How To Use Equity To Buy Investment Property

BUYING AN INVESTMENT PROPERTY WITH EQUITY 

It is common for investors to want to combine the tax minimisation advantages of buying an investment property with the benefits of not using their own savings. Equity release strategies aren’t always as straightforward as they seem and should not be mistaken for ‘get rich quick’ schemes. It is, however, an excellent strategy to leverage if you own your home, and with the right knowledge and guidance, it can deliver highly rewarding returns!

WHAT IS EQUITY?
Equity is what makes up the difference between the market value of your home and the balance of your mortgage. If you’ve had your home for a few years and have paid off some of the mortgage, that, combined with a rise in the value of your house, could mean that you’ve built equity

HOW CAN EQUITY HELP?
Let’s say you’re looking to purchase an investment property valued at $400,000 – plus the legal fees, stamp duty and insurance, you’ll likely end up with a total cost of around $420,000. In the same vein, let’s assume that you meet the loan approval requirements and your lender agrees to fund 90% of your property’s market value. You will be required to pay Lenders Mortgage Insurance (LMI) to cover the risk, but the bank will lend you approx. $378,000 which means you just need to come up with an additional $42,000 for the deposit and the other up front expenses. This is where your equity comes in.

Your home might be valued at $500,000 and the balance of your mortgage is $300,000. The $200,000 difference is your equity. As investors, you can access up to 80% of your home equity without taking out LMI (which in this example, amounts to $160,000). In essence, instead of having to come up with a cash deposit, you can simply draw down on the equity in your home.

TWO STRATEGIES TO ACCESS YOUR EQUITY

1. Refinance Your Existing Mortgage
With the equity in your home, you can secure an investment without putting any cash forward, and you can request that the lender combine your home and investment. Here, the lender will also use the title of your existing home to secure the new loan and extract a lump sum.

2. Establish A Line Of Credit Against The Equity In Your Home
You can use this strategy to access as much equity as you need to pay the deposit and associated costs of the investment property. It is even possible to obtain a second loan from a different lender and use the remaining funds to complete your purchase. Once again, you won’t be required to outlay any cash, but the titles of your properties are separated which enable greater flexibility. Another advantage to this method is that you might have enough equity and serviceability to complete another purchase sooner!

If you have enough funds to purchase more than property, why shouldn’t you? This is what we call the dual-purchase strategy, which has generated significant success for our clients by not compromising on opportunity cost.

WHAT IS THE BEST STRATEGY FOR ME?

There is no right or wrong way to access equity, as the advantages and considerations of each strategy depend entirely on your circumstances. Using the equity in your home could lead to more restrictive lending conditions over time (Strategy 1).

When purchasing property, many people use LMI, but one of the main benefits of using your home as security is that you don’t have to leverage LMI because the lender uses your entire property’s equity – rather than just the amount required (Strategy 2).

Ultimately, you want to be able to combine the benefits of not using your savings and maximising tax advantages when purchasing an investment property, and releasing the equity in your home is a great way to do this.

In addition, you will also need to have an exit strategy in place and understand how to navigate tax and charges to mitigate any impacts to your lifestyle.

That is where we come in.

For more information on the services that we provide, head to www.alliancecorp.com.au and request a no-obligation, 45-minute consultation with a Senior Property Wealth Planner valued at $495 absolutely free!

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