In Part 1, we discussed what is home equity, how to calculate your equity and 5 things to consider before you use it. Keep reading Part 2 to discover how you can use equity to purchase an investment property.
How can I use equity to buy a second home?
Aside from refinancing, there are a few other options available to you that can give you access to your homes equity for the purpose of buying another property. Before getting started, it may be wise to use a few tools – like our MyChoice Home Loans financial calculators – to wrap your head around the borrowing power, how much it will cost to buy an investment property, as well as other resources like budget planners and stamp duty calculators.
Line of credit
Using equity through a line of credit is a common strategy for property investors. It’s a way for homeowners to access funds up to a predetermined limit based on the equity in their property. By going down the line-of-credit route, you can secure the necessary loan amount for a deposit of your second home.
Reverse mortgage
If you own your primary residence outright or have substantial equity, a reverse mortgage may be an option. This strategy means you can convert a portion of your home equity into cash, which can be used for property investment. The existing home loan is repaid when the borrower moves out, sells the home or passes away. Reverse mortgages are, however, subject to tight lending criteria, so speak to your local MyChoice Home Loans consultant or bank about whether this is a viable option.
Cross-collateralisation
Cross-collateralisation uses the equity in your existing home loan as collateral for the loan on your second house. It’s a financial strategy that ties both properties together. While this can make the loan process more streamlined, it also means that any default on one property will negatively impact the other.
Can I use equity to buy a house with no deposit?
The equity from your home is what can be used as a deposit for a second property. In other words, if you have enough equity in your existing home, then you can use this amount as the deposit for your new investment property – with many lenders allowing you to borrow up to 95% LVR on your own home and 90% on an investment property.
How does using equity to refinance affect my current home loan?
Refinancing with your equity involves replacing your existing home loan with a new one, often with better terms. Drawing on how each equity you have during refinancing can be a smart way to get additional funds. However, you’ll want to factor in any impact to your existing loan. While it can increase the overall debt secured by your property, it may also result in lower interest rates or better loan terms.
Make sure to speak to one of our MyChoice Home Loans consultants or tax professionals to make sure that any refinancing decisions you make align with your overarching financial goals and won’t jeopardise your current loan structure.
How to increase your home’s equity
Looking to build up your home’s equity so you can leverage more funds for a cash deposit on future investments? Here’s a few strategies to consider:
· Home improvements: Improve the value of your home through strategic home improvements, renovations, extensions and more.
· Market appreciation: Monitor market appreciate on homes in your area by staying informed about current trends.
· Additional loan repayments: You may be able to make extra mortgage repayments to built equity in your home faster. Just make sure you won’t be financially penalised.
· Maintain your property’s condition: Regular home maintenance and upkeep will help to preserve the value of your existing home.
· Energy-efficient upgrades: You might consider investing in energy-efficient upgrades – such as solar panels or EV charging batteries that lower your utility bills while also making your property more attractive to buyers (and therefore more valuable).
Tips for investing in property
Investing in property can be a lucrative strategy – but only when done with plenty of research, professional advice and careful consideration. Before jumping into property investment, make sure you research local markets, consider long-term market trends, get tax advice from an expert or do your due diligence of using equity to buy.
