If you already own your own home, you may have seen the equity in your property build over recent years. Have you wondered how you can use that to become a property investor, too?
It might be easier than you think. It is often possible to borrow against the equity in an existing home to buy other properties. Here are some things you’ll need to know before you begin.
How much can you borrow?
How much you will be able to borrow will depend on your personal circumstances. But subject to your servicing ability, you may be able to extend your existing mortgage to fund the deposit on your next property.
Broadly, banks that are subject to the Reserve Bank’s loan-to-value rules will often let you increase your lending to 80 per cent of the value of the home you live in, less what you currently owe on your mortgage.
For example, if you own a house that is now worth $1 million and your loan is $500,000, the bank may be able to consider lending you $300,000 ($800,000-$500,000) against the property to act as a deposit on another one.
The lender will then assess the borrowing required based on the amount of rent you will receive, your own income, and a range of other factors that affect affordability.
At the moment, banks are limited in the lending they can offer to investors with deposits of less than 40 per cent, so that hypothetical $300,000 would most likely need to represent 40 per cent of the purchase price of your new investment.
Note that non-bank lenders do not have these constraints, but the interest rates they charge may be higher; they also still have other criteria that needs to be met. We can help you work out whether that suits you.
How can you build equity?
If you don’t quite have enough equity in your existing property to fund your investment yet, there are a few ways to boost it. You can wait for the market to move, do some renovations to create extra value, or pay down your mortgage faster.
There are a range of online services that will give you an indication of what your property might be worth, or you can pay for a valuation if you have done work on it and want to prove its new value.
What sort of loan would you take?
You’ll have the same questions for your investment property loan as you dealt with for your owner-occupied property.
Usually, people keep the lending separate to make accounting easier when it’s time to do your end-of-year tax return. Whether you want that new lending floating or fixed is up to you. Some investors opt for interest-only payments for a period, perhaps when the borrower is getting used to managing the new property.
Some points to remember
When you’re working out how much you can afford to service for a rental property loan, consider the extra costs that can come with owning an investment property. You may need to prepare for periods of vacancy, property management fees and general maintenance and repairs that will need to be dealt with.
Like to talk?
There’s a bit to work through when it comes to making your first property investment. But we help people with it all the time. Get in touch with us today to talk about what your options may be to become a landlord. Remember, we can’t tell you whether an investment property is right for your situation and objectives, but we can help you with the finance if you decide it’s right for you. We do recommend you speak to an appropriate adviser to help you decide.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.