Investing in real estate can be one of the most effective ways to build your future financial wealth. For many home owners, the equity they've built in their current property can be used to fund the deposit for an investment property. In this blog, we’ll explain how to use your home equity to buy an investment property, along with the benefits and risks involved.

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Understanding Home Equity

Home equity is the difference between your home’s market value and the remaining balance on your mortgage. For example, if your home is worth $900,000 and you owe $500,000 on your mortgage, you have $400,000in equity. Some of this equity can be tapped into to finance a new property.

How to Access Your Home Equity

If you’re happy with your current home loan, you don’t have to change this to access the equity in your property. You can get a second loan with your current lender, which is secured against your home, or you can increase your current loan amount to release the equity for your deposit to purchase an investment property.

Most lenders will allow you to borrow up to90% of the value of your property, minus the balance of your current loan. It’s important to note that any loan which is more than 80% of the value of a property will incur lenders mortgage insurance which is a fee paid by you to cover the lender insuring your loan.

If you are looking to get an equity release up to 80%, your home is valued at $900,000 & your current loan is $500,000 the available equity would be $220,000, this is calculated as follows:

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·        80% of the property value - $900,000 x 80% =$720,000

·        Less current home loan - $720,000 - $500,000 =$220,000

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An Assured Lending Mortgage Broker can assist you to get a bank valuation on your property and calculate the equity available for you.

Even when you have a lot of equity in your home, you still need to meet a lenders criteria to borrow both against the equity on your current property as well as apply for another loan secured against the investment property to pay for the remainder of the purchase.

Your Assured Lending Mortgage Broker will provide you with detailed calculations on your borrowing capacity as well as a comparison of the most suitable home loans available with all the costings.

Benefits of Using Home Equity to Invest

1. Leverage: Using your home equity allows you to invest without needing to save for a deposit which can accelerate your investment strategy.
2. Potential for Appreciation: Real estate often appreciates over time, meaning your investment property could increase in value, providing significant returns.
3. Rental Income: An investment property can generate rental income, which can help cover mortgage payments and other expenses, and potentially provide positive cash flow.
4. Tax Benefits: Mortgage interest and other costs associated with an investment property are tax-deductible.

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Risks to Consider

1. Market Fluctuations: Real estate markets can be unpredictable. If property values decline, you could end up owing more than the property is worth.
2. Increased Debt: Tapping into your home equity increases your overall debt. If your investment doesn’t pan out, you still need to pay back what you borrowed.
3. Cash  Flow Challenges: If your rental property doesn’t generate consistent income or incurs unexpected expenses, you may struggle to cover your mortgage payments.
4. Property Management: Owning a rental property and dealing with tenants requires time and effort and there are costs involved in having a property manager to take care of all the details.

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