Home equity can unlock the door to an investment property portfolio.
Property values across Australia’s state capital housing markets have risen by a combined average of 10% over the last year. Put simply it means your home could be worth around 10% more than it was this time last year. That’s a valuable boost to home equity – and it’s money that can be put to good use further expanding your wealth by buying an investment property.
Unlocking your equity
If you’re not familiar with the term ‘home equity ’ it simply refers to the difference between the housing market value of your home and the balance of your loan. For instance, if your property is worth $600,000 and your loan is worth $400,000, your home equity is $200,000.
This is money you may be able to use to fund the beginnings of an investment property portfolio as lenders may accept home equity in place of a cash deposit.
Here’s how it could all work.
Two properties. One loan.
One strategy is to use a single loan secured by both your home and an investment property. It’s a process known as shared security or ‘cross collateralising’ a loan. Don’t let the jargon put you off, it’s actually quite straightforward.
Let’s say for example, you have the home mentioned earlier worth $600,000 with a mortgage of $400,000 and equity of $200,000. If you were planning to buy an investment property worth $300,000, you wouldn’t have sufficient equity to fund the entire property. However you may be able to take out a loan of $120,000 (secured by both properties), which would make up the remainder of the rental property value as well as the usual buying expenses like stamp duty and legal fees.
The end result would be one loan of $520,000 ($400,000 plus $120,000) underpinned by two properties with a combined property value of $900,000.
Or, you may prefer to keep the loans entirely separate. This could involve refinancing your home loan to tap into part of your home equity, and having a second loan secured by the rental property to make up the balance of the purchase price.
Talk to your broker
The main point is that your home equity is a valuable resource. Your local Aussie broker can explain how you could make good use of your home equity to build a property portfolio.
Are you thinking of buying an investment property using your equity? If yes share your reasons why in the comments below!
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 RP Data-Rismark February Hedonic Home Value Index Results, 3 March 2014