Many people think that having an investment property is a pipe dream. How are you meant to save for a deposit on a second home while you’re still paying off the first?
Well, there is a way. And it’s not that hard!
If you already have a mortgage and had it for a little while, have you considered using your equity to get an investment property?
You may not have realised, but your equity increases over time, either with your property’s value increasing (due to market demand and property prices) or by your repayments reducing what you’re owning.
For example, your property may now be valued at $800,000, and your loan is currently sitting at $400,000 – this leaves you with $400,000 of equity in your property.
Here are our top 3 equity tips.
1. What to use your equity for
The most common thing people use equity for is to upgrade their home and buy a bigger one as their family grows. Most people start small to break into the property market (while not stretching their funds too thin) and upsize over time.
Other people prefer to hang onto their much-loved family home and use their equity to renovate it and make improvements. If you’re not ready to move away (due to work, school etc.), a renovation is a perfect way to give yourself more room to play, while updating the look and functionality of your home (replacing appliances, painting, adding extensions etc.).
But if you’re happy with your home and have no intentions of moving, you’d be smart to start building your wealth by buying additional investment properties using your equity.
2. How to avoid unnecessary fees
Anytime you take out a home loan; if you want to avoid Lenders Mortgage Insurance (LMI), you need to keep the value of your loan at or below 80% of the value in the property.
For example:
- The value of your property if $800,000
- Keep the loan at or below 80% which is $640,000 in this case
- Your existing home loan is $400,000
- You have $240,000 equity in your home to access (and not pay LMI on)
3. How to potentially borrow 100% of the purchase price
Using the above example of having $240,000 equity in your home, you can use this amount as a deposit, and to pay for stamp duty, on an investment property. You can then borrow the remainder of the investment property value using the equity you’ll get in this new property.
If this all works evenly, you can potentially borrow 100% of the purchase price plus cover costs like stamp duty.
Then, using this principle, you can keep purchasing investment properties. It’s a great way to set yourself up for a financially secure future.
How often should you be reviewing your home loan?
According to research, the average life of a loan in Australia is between 3 and 4 years. That means most of us are savvy enough to be keeping an eye on our mortgage and make sure they are working for us.
And you don’t always need to refinance to get a better deal, but you should speak to your bank (or mortgage broker) each year to make sure your deal is still current. With so many new loan offerings on the market each year, a phone call, or quick visit, can save you money on interest.
So, if you haven’t looked at your home loan over the past 3 years, we highly suggest you have a review. It’s more than likely that you’re paying too much interest.
It’s also a great way to find out how much equity you have in your home and if it’s time you can look at getting an investment property.
There are tonnes of finance companies who’d love your business
If you’re thinking refinancing is a hassle as you don’t want to move banks etc. don’t be discouraged – you can always strike up a better deal with your current lender.
However, it does pay to be open to all the lenders and loan products available in today’s market. There’s a lot of competition and lenders are all wanting you to choose them so will do their best to win you over.
If your bank doesn’t fight to keep your business, then move on. And don’t be swayed by any old offer they give you. Make sure it’s up to par with other lenders – do your homework (or ask a mortgage broker to do it for you).
Even if you refinance and save half a percent (0.5%), on a $350,000 home loan, you’ll save $1,750 a year in interest. Multiply that over a 30 year home loan, and you’re pocketing $52,500 instead of giving it to your lender.
Want advice on your investment or mortgage options?
If you don’t have time to research all the loan offers available or want some advice on whether you’re ready for an investment property, make an appointment and speak to me.
Email me at: aaron@ekfinancialgroup.com.au
Or call us on 03 9020 1888.
