Accessing Equity To Purchase An Investment Property

Accessing Equity To Purchase An Investment Property

Many people dream of owning one or more investment properties that they can rent out and either sell upon their retirement or use for passive income, and while investing in property does not always guarantee a return, for most people it feels easier, safer and more tangible than investing in stocks.

With property prices on the rise in Cairns, it may be possible to use the equity in your existing home to set you up with an investment property, and you may have even more equity than you thought. There’s good news for homeowners in Cairns who are seeking to use their equity to get into the property game, as houses within the Cairns Local Government Area now have a median price of $471,000, which is a year-on-year increase of 0.93%. This figure has already jumped in the first quarter of 2021, up from 0.91% for the 2020 calendar year.

This kind of movement may be due to families and couples seeking a ‘sea-change’ or ‘tree-change’ after spending many months of 2020 couped up in small apartments or in urban areas who are now craving a lifestyle change.

While some of the tree and sea changers will be looking to buy their own homes, there will also be renters in the mix, which is music to the ears of investors and prospective investors.

So, how exactly can you use the equity in your existing home to jump into the real estate investing and purchase and your next property?

Find out how much equity you have available in your home

As a general rule, you can usually borrow 80% of the value of your home, less any debt you owe against it.

For example, if your home is worth $500,000 and you have a $250,000 mortgage, you may be able to borrow up to $150,000.

The reason a bank won’t lend the full value of the home is in case housing prices drop, which would leave you owing a debt that is more than the value of the home.

Alternatively, if you take out Lenders’ Mortgage Insurance then you may be able to borrow more than 80% of the value of your home.

What does the bank take into consideration when lending against equity?

It is important to note that just because you have equity in your home it does not mean you will be able to access it. As with any loan, a bank will always take into account your overall situation and the ability to repay the loan.

Your lender will consider factors including your age, income, debt and dependents before agreeing to the loan. They also may choose not to loan you the full 80% of the equity you have in your home.

Work out how much you can spend on a property

Using the hypothetical example above means you may be able to borrow $150,000 but this does not necessarily bring you to the figure you should spend on the property. As with all property purchases, you should factor in other costs such as stamp duty, conveyancing and any other associated fees.

Some investors like to use the ‘rule of 4’ method, which is a simple multiplication of your equity by four. In our hypothetical scenario, this would mean the recommended maximum property price is $600,000.

Don’t overextend yourself

Property investing can be very rewarding financially and it can be an excellent way to secure your financial freedom in retirement, however, like any investment, it holds risk.

Ask yourself this: if your capacity to earn a stable income is diminished, will you still be able to hold onto the investment property? If the property cannot bring in an income for an extended (or even short) period of time, will you be able to pay both mortgages? If you had to sell the property at a loss, would you recover financially?

It is always a good idea to seek professional financial advice or speak to a mortgage broker in Cairns before making a large investment like a property purchase.