Home equity refers to the difference between the market value of your property and the balance on your mortgage. You may have good home equity if you have owned your home for a considerable amount of time, which means you can start investing even if you are still paying off your home. In general, if the value of your home increased since you purchased it, the equity you can access will also have increased, so long as you haven’t borrowed any further money against the property since you bought the home.
Home equity can be used as security when you borrow further money from a lender for things such as extending your home, renovating it, buying a car, or to travel. Aside from that, you can use home equity for property investment in order to grow your wealth.
Calculating Your Equity
How can you use your home equity for property investment? You need to calculate your equity first. You do this by subtracting your remaining debt on your mortgage from the value of the property. For example, if the property value is $400,000 and you have $150,000 left in your mortgage, then your home equity is $250,000.
While it looks very simple on the surface, it can be a bit more complicated in reality. First, the lender will send a valuer to your property. Normally, their computation of the value is not the same as what you think the market value of your property is. Your home equity will increase both as you pay off your mortgage and as the value of the property increases. This means that you can increase the value of your equity by regularly paying off your mortgage as this reduces your debt. However, it will be affected by the changes in the value of your property, which means your equity can decrease with negative market growth, even if you are diligently paying off your mortgage.
The term “available equity” is the actual equity value that you can use. In most cases, lenders will ask you to maintain 20% of the property value as a buffer. You can use your remaining available equity in two ways:
- Cross collaterisation – This means utilising two or more properties as security for a loan. The lender will combine your home and your investment to get a new loan for the cost of the purchase, therefore meaning you do not have to put money down up front. Keep in mind, though, that in this method, the lender will get the title of your home and your new property to secure the new loan.
- Different loans – Having separate loans will enable you to get only the equity that you need for the deposit and costs of the new property. A different loan will be taken for the remaining amount that is needed to complete the purchase. Like cross collaterisation, you do not have to put cash down up front in this method.
Now that you know how you can use equity for property investment, here are some things to consider:
- No matter what method you use for your property investment, keep in mind that there are fluctuations in the market, and prices vary in different locations. Reduce your investment risks by diversifying your property portfolio. Don’t put all of your eggs in one basket – spread out in different areas and buy different properties if you can.
- Another thing to take into account is that even though you have a lot of home equity, you may not be able to borrow against it. The bank takes a look at your current income, your family, current debts, etc. If you cannot afford the repayments on your income, you may not be able to gain access to your equity. Also, the bank will not lend you the full amount because obviously, it needs to have security that is worth less than what you owe in case property prices decrease, for instance. In most cases, the bank will lend you about 80% of the value of your property, and then the debt that you still owe against it will be subtracted from that. There are ways you can borrow more than 80% of the property value so seeking the right advice from a Launch broker is essential to getting your finances structured correctly
- Do not invest in property if you do not have enough funds aside from your available equity. Have a fool proof budget that includes a buffer account for future expenses including interest rates, repairs, etc.
- Always do your research to have a better understanding of the market and how you can keep yourself protected. Take your time and see the options that you have by talking to a mortgage broker. They will be able to help you determine if you can keep up with the repayments should there become an issue in your property investment.
Accessing your home’s equity may enable you to invest in property sooner that you expected. However, also remember that as with other types of investments, you have to make sure you take the necessary steps to lower your risk and increase your chances of success.