There is no doubt the market is hot, and depending on who you speak to, the end doesn’t appear to be in sight anytime soon. For some people, they believe it’s a great time to buy. Get into the market as quickly as possible and ride the wave for whatever time it has left. For others, they are a little tentative and want to wait for things to cool before dipping their toe in.
Whatever the case, if you have owned property for more than a year or so, chances are you could have some equity in your property, and you may have heard that you can use it to buy another property. But how?
In simple terms, the bank lends based on your borrowing capacity, and the equity in your property. Equity is basically a fancy term for the value of your property, minus the loan – i.e. the portion of the value of the property that you actually own. They need equity in case something goes wrong and you’re not able to make repayments on the loan, as this ensures they don’t sell the property at a loss. I liken it to the casino – house always wins! Generally speaking they want to see 20% equity in your property to avoid mortgage insurance, and as little as 5% if you’re happy to pay it.
So what does this all mean for property owners?
It means that if you have more equity than this, you could potentially borrow more against your property. For example, let’s say you purchased for $500k in 2019, and your property is now worth $600k. If your loan balance is 80% of the original purchase amount – $400k – then you could potentially borrow another $80k against your property to use for other purposes. The purpose needs to be acceptable to the bank, but can include renovations, debt consolidation, future investment, or another property.
If you want to purchase another property with a 20% deposit, then the $80k would give you a purchase of around $325k after you factor in costs such as stamp duty and other fees.
As always, there is qualifying criteria, so if it’s something you’re interested in taking a closer look at, feel free to book in a time to chat with me here – Calendly Link | Joel Wyld