The general slowdown of first-home buyers combined with flat property prices and rising rental returns has created near perfect market conditions for property investors.
According to Smartline Personal Mortgage Advisers, borrowers who made their first home purchase five years ago are now well placed to purchase a second property.
“These are the people that bought within their means, have been working hard to pay down their mortgage and who have benefitted from steady increases in property values over the ensuing years and, as a result, now have access to significant equity,” said Smartline managing director Chris Acret.
For example, a property purchased five years ago for $300,000 would be worth about $400,000 (assuming an annual increase in value of 5-7%).
Let’s say the borrower put down a 10% deposit and took out a home loan for $270,00. After five years of repayments, the loan balance is now $245,000.
With the lender allowing them to borrow up to 90% of their property’s value, they now have access to more than $100,000 of equity.
Now should the borrower decide to purchase a second property worth $400,000, they will have to add 7% of the home’s value to fund fees and charges, which means they will actually require $428,00 to fund the purchase.
Assuming they take out a loan for 90% of the property’s value, the loan amount will be $360,000. They will be required to fund the shortfall of $68,000, which they will be able to do so easily using the available equity of $100,000 in their home.
According to Acret, a common misconception of homeowners is that a second property is “double the commitment”. But in reality, having a tenant pay a large part of the mortgage and the associated taxation deductions make it much more palatable.
But Acret warns that while the equity might be there to fund the initial purchase, investors need to be aware of ongoing servicing of the debt as a result of any shortfall in the income generated by the property and the associated expenses.
“Property investment isn’t necessary for everyone,” Acret said. “But for those people looking to build long-term wealth, the equity sitting in their current home could provide the perfect springboard.”