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How to use your home's equity for an investment property

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The idea of property investment is very enticing to many of us, but it is often overlooked because of the mistaken belief that it is only within the reach of the affluent, writes North Shore finance broker Louisa Sanghera. But did you know you can realise your property investment goals through capitalising on the equity built up in your home? 

The truth is that with the right finance, planning and strategy, an investment property may be easier to attain than you think.

One of the key issues for those considering property investment is raising a deposit, but there are options.

Property buyers are typically required to provide 20 per cent of the property’s value and, for some, this is a real hurdle. But existing homeowners may be able to release equity (the increased property value) that’s built up in their own home to cover some, or even all, of the deposit on an investment property.

The example below highlights how borrowers can capitalise on the equity in their homes to purchase an investment property.

Example
Ian and Maria bought their four-bedroom home in 2003 for $250,000 with a deposit of $50,000 and a $200,000 mortgage. They recently agreed that they’d like to break into the investment market and so they contacted their mortgage broker to discuss this.

Their broker suggested they should get their home valued with the result that it was now worth an estimated $490,000. Since buying their home, Ian and Maria had paid $49,000 off their original loan which left just $151,000 due on the mortgage.
The current valuation of the property, minus the outstanding loan, gave them $339,000 of equity.

Their broker suggested refinancing their home to the loan ratio of 50 per cent, which would release some equity for an investment property. Based on the current property value, and assuming they could afford the repayments, Ian and Maria would be able to borrow $245,000 – which results in an extra $94,000 available for investment purposes.

This plan was very attractive to Ian and Maria because their only other option was to liquidate their managed funds to raise the deposit for the investment property, and this was not a feasible option as the fund balances were low.

Ian and Maria decided to put down a 20 per cent deposit and take out an 80 per cent mortgage on a two-bedroom apartment costing $360,000. The deposit total was $72,000, which left an additional $22,000 to cover stamp duty and other expenses. The remaining purchase price of $288,000 was covered by the loan.

With a larger loan on their family home, Ian and Maria’s repayments had gone up, but the repayment on their investment property was almost covered by the weekly rental it was generating. And because they managed their investment themselves, they reduced the overheads against the gross rent. Also, by taking out an interest-only loan, they minimised their monthly outgoings which improved their cash flow.

If you would like to know more about realising your investment goals by putting your current property to work for you, you can contact experienced finance broker Louisa Sanghera on 1300 855 022, or visit Zippy Finance

Have you managed to use the equity on your home to buy an investment property? If you have any tips or advice for North Shore families, please let us know in the comments section below.

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