If you're thinking about buying your second investment property, it's a good idea to understand how to leverage equity in your existing home to purchase another property (or two).
What is Equity?
If you don’t have the savings to use as a deposit to buy your next home or investment property, a home loan refinance can give you the required equity to fund your deposit.
There are a number of ways that your property can quickly rise in value, the most common is due to a property boom, such as the recent property boom in Sydney. If you had owned your own home in this period or even longer, your property would have risen in value and equity.
The equity in your home is the difference between the market value of the property, less the money you owe on your mortgage. When you approach a lender such as Australian Mortgage Options (AMO), they can help you to find out the value of your home and tell you how much money you can use as a deposit on an investment property.
According to finance expert and the Managing Director of AMO, Robert Projeski: "We take a snapshot of the person’s current income and serviceability, so that we can get an idea of how much they can afford in mortgage repayments. We take a valuation on their existing property to see how much equity they have in their existing property".
Example of How it Works
As an example, let’s say the current value of your property is $500,000 and the balance on your mortgage is $100,000. This means that you have about $400,000 of equity in your home.
Most banks will lend you up to 80 per cent of the equity in your home (without having to pay Lenders Mortgage Insurance). This equates to $320,000 that you can use to buy one or several investment properties.
If you want to take out a loan of say 90% or more of the property value, you will have to pay the additional Lenders Mortgage Insurance. Lenders Mortgage Insurance or LMI is an insurance which protects the lender in the event that you cannot repay the loan.
The Difference Between an Owner Occupier Loan and an Investment Loan
One important thing to remember is that you may be able to offset the expenses of buying an investment property through your own personal tax deductions. However, you cannot claim tax if you purchase a property that you intend to use as your main place of residence.
For an owner-occupier, Mr Projeski recommends that buyers should try to reduce their interest repayments as much as possible.
“On an owner occupied property we strongly recommend that the owners pay off as much as they can, and park any excess cash into their home loan” said Mr Projeski.
Most people can capitalise on the expenses incurred on their investment property by using it to minimise their tax. “With an investment property, most of the time people take out an interest only home loan. We encourage people to pay the minimum amount towards the loan and try to maximize their potential tax deductions" said Mr Projeski.