If you’ve been thinking about buying a second property, you might have come across adverts, emails, or news articles talking about unlocking equity. This is a strategy employed by many buyers, but what does it mean, and could it work for you?
What does it mean to unlock your home equity?
If you own your home, and you’ve been paying off a mortgage over a period of time, there’s a chance that you might have equity in your property. The equity is calculated by taking away any money that is owed on the property from its current market value. If an agent values your home at $500,000, for example, and you have $200,000 outstanding on your mortgage, this will equate to equity worth $300,000.
If you have equity in your home, it is possible to use it to fund the purchase of a second home. This option might appeal to you if you like the idea of having a holiday home, you’re thinking about downsizing and renting your existing property out, or you want to invest in bricks and mortar.
How to use the equity in your home
When you’re searching for a property, lenders can offer you finance against the value of an existing property, taking the equity into consideration. This is how the process works:
- Calculating the equity in your home: before you start searching for another property, it’s important to work out how much you can afford to spend. The first step is to figure out how much equity you have in your home. This is done by comparing the market value and the remaining mortgage or home loan debt.
- Finding the right finance option: there are various options when it comes to using home equity to buy an investment property.
These include:
Using your equity as a deposit
Refinancing your mortgage
Opening a line of credit
Taking out a home equity loan
3. Setting a budget: once you know how much equity is in your home, and which kind of financial product you wish to use, you can set a budget for your investment property.
4. Finding the right property
Applying for finance tips
Once you’ve decided to use the equity in your home, the next step is to apply for finance. Before you submit applications, it’s beneficial to consider ways to maximise your chances of approval and improve your borrowing prospects. You can do this by:
- Clearing existing debts
- Making extra payments on your current mortgage or home loan
It is also advisable to explore all the options open to you and to speak with a financial adviser to make sure that you’re applying for the right kind of loan.
Advice for buyers thinking about buying an investment property using home equity
Buying a property is a big step, and the last thing you want is to put your assets at risk by making the wrong decisions. If you’ve secured funding, and you’re ready to start your property search, make sure you follow these steps:
- Do your research: gather as much information about areas that take your interest and specific properties that tick the boxes before you make any offers.
- Decide what you want to do with the property: do you want to buy to let? Do you want to sell? Are you keen to keep the second home as a house you can use? It’s critical to go into a property search knowing what you’re looking for. If you’re hoping to rent a property out, for example, you’ll need to create an ideal tenant persona, and think about what they’re looking for. If you’re keen to let your home to young professionals, transport links and proximity to shops, bars, cafes and restaurants are advantageous.
- Make sure you can afford the investment: if you’ve worked hard to pay off a large chunk of your mortgage, you don’t want to put pressure on yourself by spending too much on an investment property. Set a budget and stick to it.
- Understand your tax liabilities: buying a second home may impact the amount of tax you pay. Before you sign on the dotted line, make sure you know how much this is going to cost you.
- Keep some money back: whether you use your equity as a deposit or you refinance, you might find yourself paying more each month. It’s always wise to have a buffer to prevent cash flow problems.
Summary
Unlocking equity in a property can be a means of enabling buyers to secure a second home for investment purposes. If you have equity in your home, and you’re looking to invest in another property, it’s wise to review and research your options carefully, to seek professional advice and to set a budget that gives you breathing space.
Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au
