Vanessa de Groot| Domain| 11 August 2017
Since the start of the current growth cycle in the middle of 2012, many property owners have seen the value of their property skyrocket, so much so that some have almost become millionaires in the space of just a few years.
Over this time median prices in Sydney and Melbourne have risen by more than 80 per cent and more than 60 per cent respectively.
Now you’ve got all this equity in your home, the question is what do you do with it, if anything?
Some people are capitalising on the money they’ve made by selling up and moving to more affordable cities such as Brisbane, where your money goes a lot further. You can buy a much better property in a comparable location and often have some money left over.
Equity is the difference between the value of your property and the outstanding debt on it.
Another option, however, is to access the newfound equity in your home to buy an investment property to grow your wealth. So rather than saving up and using a cash deposit to buy another property, you can use your equity instead.
How do you do this?
The first step is to determine exactly how much equity you have in your home.
Equity is the difference between the value of your property and the outstanding debt on it. So, if your property is now worth $1 million and you owe $400,000, the current equity is $600,000.
While you can estimate the value of your home yourself by looking at comparable sales or you can get an appraisal from a real estate agent, the best bet is to contact your lender; they’ll get a proper valuation done to determine the value.
From that, they’ll tell you whether you have enough equity to be able to borrow again to buy an investment property, and how much you can borrow.
Be aware that even though you may have available equity of $600,000 in your home, there is a difference between this and useable equity, which is what the bank will allow you to access from a lending perspective.
The useable equity is usually 80 per cent of the current property value minus the debt, so, using the above figures, your usable equity would be $400,000.
Generally if you borrow more than 80 per cent you will need to pay lenders mortgage insurance, a one-off payment protecting your mortgage lender against your default.
Once your equity level has been determined, you can tap into it – or access it – by refinancing. Essentially you get a new bank loan that you can use as a deposit – which is typically a line of credit, but can be a lump sum loan – with the equity in your home being used as collateral for that loan.
So when we talk about ‘using’ the equity, it’s only to secure another loan that can in turn be used as a deposit to buy another property, so you don’t have to save up a cash deposit. It’s not as though it’s free money.
While your existing equity is used as security for borrowings for a deposit, you’ll also need to borrow the remainder of the money needed to buy an investment property, and possibly also to cover the costs.
Even though you might be able to access equity in your home to buy an investment, you should only go ahead with it if you can really afford to take on the extra financial commitment, as you’ll be borrowing a very significant extra sum of money.
You’ll need to be able to prove to a lender you can service greater borrowings, and you’ll need to have the ability to pay any shortfall between rent and costs, including mortgage repayments and bills, such as council rates and insurances. You will also need a cash buffer in the event of something going awry, such as your property being vacant or an unexpected maintenance cost.
If you’re looking to invest using the equity in your home, always ensure you seek personalised advice from a lender before doing anything.