Using Equity to purchase an Investment Property
Heidi Armstongg, Director of State Custodians Mortgage Compnay, gives advice on how to use the equity in your home to purchase an investment property.
Factoring the equity into your loan could offer you the chance to avoid paying Lenders Mortgage Insurance.
Watch this video now, and let Heidi explain how this all works.
Video transcript below:
Heidi Armstrong, Director, State Custodians
Heidi Armstrong: Hi, I’m Heidi Armstrong and I am the Director at State Custodians Mortgage Company.
I’d like to talk to you today about purchasing an investment property using the equity in your own home. For many people the first property purchase is their own home. However, over time if you have been diligent in paying off your loan and you purchased well, then the equity position that you hold has no doubt improved. Put simply, equity is simply the difference between what your property is worth and what you owe. So if you have $300,000 to pay off your own home and the home is worth $500,000 then your equity position is $200,000.
Your equity is factored into the loan:
This equity can be used instead of having to stump out a large cash deposit.
Borrow the full purchase price plus costs:
And providing you have sufficient equity in your home, you can actually borrow the full purchase price as well as any costs such as your legal and your stamp duty costs.
Total LVR is 80% or less:
In addition the benefit is if you have sufficient equity you can avoid having to pay mortgage insurance by ensuring that your total loan to value ratio is 80% or less.
Example – Investment Loan
Let me demonstrate using an example. You want to purchase an investment property valued at $400,000. Let’s assume your current home is valued at $500,000 and that you currently owe $300,000. Let’s also assume that the total cost to purchase the investment property including stamp duty, legal fees and loan fees are $20,000.
This means that your new loan needs to be $720,000 comprising $300,000 to cover the cost of your existing home loan debt, $400,000 to cover the full purchase price of the new investment property and $20,000 to cover costs. Given that the total value of all properties is $900,000 being $500,000 for your home and $400,000 for your investment property, your loan to value ratio is 80%. So no mortgage insurance should be payable.
Keep in mind that while equity is a good way to come up with a deposit, you still have to demonstrate to the lender that you can afford the full loan amount. Your lender can help you with this process and they will take into account any expected rental on the investment property as well as any existing commitments that you may have. Of course, purchasing an investment property is a big step. So be sure to talk to your financial advisor about your personal situation to ensure this is a good plan for you.
I hope that this information has been helpful and if you are wondering about the equity position in your home, feel free to call our friendly credit team at State Custodians and we can help crunch the numbers for you.
Visit State Custodians Mortgage Company now at www.statecustodians.com.au
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