Low interest rates and a flat housing market may mean it’s a good time to use the equity in your home to invest in a second property.
Home equity is the difference between the market value and unpaid mortgage value of a home.
So if you bought a home for $500,000 five years ago and still owe $400,000 on it, if you could sell it in the current market for $700,000 because it has increased in value, the equity of that home is $300,000 ($700,000-$400,000).
Some banks are willing to loan you money based on that, so it gives you access to $300,000. That’s quite a large sum at your disposal to invest and could be a terrific platform from which to buy another property.
Once your property has increased in value through paying down the mortgage, home renovations or market growth you can organise refinancing your mortgage loan at its increased value.
Bear in mind the bank will keep back a bit of the equity as security. This usually differs based on how confident they are your property has gone up in value and will stay up in value. It’s the same process for establishing a loan-to-value ratio (LVR) and if the bank is comfortable with things will usually sit at around 80%. It is possible to lend more than 80% by taking out Lender’s Mortgage Insurance (LMI).
In our earlier example that would leave you with $240,000 to invest in another property. The next decision to make is whether to access that loan as a line of credit or a lump sum.
Line of Credit
This is effectively a very big credit card. The big advantage of this is that you’ll only pay interest when you decide to spend or invest and you’ll only pay interest on the amount you do.
You can also link your line of credit to an offset account to reduce the amount of interest you’re paying. Whatever is in your offset account you can deduct from your loan amount and you’ll only pay interest on that reduced amount.
As opposed to a line of credit that you pay interest on as you use when you decide to invest in something, you can release your equity as a lump sum. The downfall to this is you’ll be paying interest on the entire amount from the moment you refinance.
Call Perry Finance today to help find out how much equity your home is holding and how it might be best to access it for further investment.