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How To Buy an Investment Property using Equity from Your Existing Property

Home-Equity-Loan

If you’re looking to buy an investment property, then using the equity on your current property to take out a property investment loan is one way to do it (without putting down a hefty cash deposit).

What is Equity & how does it work?

Equity is calculated on how much your bank will lend you based on your existing property’s current market value and the amount you still owe on your home loan. The banks have a different policy for the maximum lending amount against owner-occupied properties and rental properties.

As an example:

1- If the value of your current owner-occupied house is $1,000,000, the bank will lend you up to a maximum of $800,000 (80%) and if the amount you still owe is $500,000… then your equity is $300,000.

2- If the value of your current rental property is $1,000,000, the bank will lend you up to a maximum of $600,000 (60%) and if the amount you still owe is $500,000, then your equity is $100,000.

Also Read This- How to choose the right Interest Rate for your Home Loan?

However, if you are proposing to purchase an investment property which is under construction or is a newly built property, the banks may consider your proposal at less than 40% deposit or equity. Speak to the bank or a financial adviser.

Equity can allow you to put down a deposit by taking out an equity home loan instead of having to save the deposit in cash.

There are two ways to build equity. The first is for the value of your home to increase either based on the current market or renovations.

The second way to build equity is by paying off your mortgage or by reducing the credit limit of your home loan.

Why Would You Use an Equity Home Loan?

The reason why many investors leverage the equity on their current homes is that it allows them to purchase many investment properties with property investment loans —instead of putting down a hefty cash deposit.

This allows investors to get into the market quickly. If there is enough equity in your existing property, you can potentially borrow one hundred percent of the rental property purchase price, using the existing equity.

What Should You Consider When Borrowing Against Your House Based on Equity?

If you’re thinking about taking on an investment property mortgage based on your current equity, there are a few facts you should know first.

  • The current market value of your property
  • How much do you still owe the bank
  • The current value of the investment property
  • The potential income based on this investment property

Keep in mind, borrowing based on equity is not a risk-free process.

Also Read This- Restructure Tool to Optimise Savings and Repay Your Loan Faster

Consider these things when investing in a second property with an equity home loan:

If you’re interested in buying a second property with the sole purpose of renting it out, there may be additional costs to consider.

As an example, there may be maintenance fees or the cost of an ongoing property manager. You may not have tenants soon after you buy the property, and the cost of the mortgage may outweigh the income you generate.

Another factor to consider is the market. If the market is falling or does not follow your ideal forecast, this could lead to a change in net worth. This is especially important if you are buying the house for capital gains rather than the sole purpose of cash flow.

Another important fact to remember is that having equity does not always mean you can borrow more money from your bank. The borrowing capacity between lenders will vary depending on your income and the perceived risk by the lender.

It is advisable that you carefully consider your income and expenses as your cash flow should be comfortable after you purchase the investment property as in many cases, your rental income may be less than the outgoings including loan interest.

How To Manage Multiple Properties with One Bank?

If you want to take on a property investment loan with your current bank, keep in mind that your bank may or may not approve this loan.

In some cases, you may need to refinance with equity first and then apply for a new home loan from a new bank.

Banks have different rules around serviceability and the risk they’re willing to take for property investors. Therefore, even if you have substantial equity, this doesn’t guarantee a pre-approved or even an approved loan.

Also Read This- Housing Affordability in Auckland

Therefore, it’s recommended you reach out to your mortgage advisor to discuss your options before changing your loan structure.

Want To Know More About Your Home Equity?

If you’re considering putting down a deposit on an investment property or second property with equity, then make sure to do your homework and weigh out all your options.

At Kiwi Mortgages, we have a team of experienced financial advisors who can advise you based on your circumstances.

Call us at 0508 33 22 11 (Toll-Free) 021 030 8135 or email our team to get support from one of our experienced advisors – free of charge: info@kiwimortgages.net.nz