Understanding Equity in Property and How to Use It to Buy An Investment Property

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Understanding Equity in Property and How to Use It to Buy An Investment Property:

Building wealth through real estate is an exciting journey and equity plays a pivotal role in this process. If you’re a property owner or aspiring investor, understanding how to leverage equity can be a game-changer in expanding your portfolio. This blog post will provide insights into what equity is and how you can use it to buy more property.

What is Equity?

Equity is the difference between the current market value of your property and the amount you owe on your mortgage. In simpler terms, it’s the portion of your property that you truly own. For example, if your property is worth $500,000 and your mortgage balance is $300,000, you have $200,000 in equity.

How Equity Grows

Equity increases in two main ways:

  1. Paying Down Your Mortgage: Each mortgage payment reduces the principal balance, thereby increasing your equity.
  2. Property Appreciation: Over time, property values typically rise, which boosts your equity.
  3. Renovations: Improving your property through renovations can increase its market value, thereby increasing your equity.

Using Equity to Buy More Property

Many people are surprised to discover that they can afford to buy an investment property without having saved a large cash deposit. One of the most effective strategies for growing your real estate portfolio is leveraging the equity in your existing property to finance additional purchases. We highly recommend speaking to a mortgage broker to explore the best options available to you.

The 80% Rule

When it comes to leveraging equity, lenders usually allow you to borrow up to 80% of your property’s current value. This is known as the 80% Loan-to-Value (LTV) ratio. Here’s how it works:

  1. Calculate the Maximum Loan Amount: Multiply your property’s current market value by 80%. For a $500,000 property, this would be $400,000.
  2. Subtract Your Existing Mortgage: Deduct the balance of your current mortgage from the maximum loan amount. Using our previous example, with a $300,000 mortgage, you could potentially access $100,000 ($400,000 – $300,000) in equity.

How to Check if Using Equity to Purchase Another Property is Possible for You

If you have owned your home for a number of years, it is very likely that the value of your home has increased since the purchase date. You may also be paying down your mortgage through principal and interest repayments, gradually reducing the amount owing. This results in increasing equity in your home.

Take, for example, a home that is worth $1,500,000. If you owe $500,000 on the associated loan, then you have $1,000,000 worth of equity! That’s a very strong equity position to use when purchasing another property.

Steps to Leverage Your Equity

  1. Get a Property Valuation: Obtain a professional appraisal to determine the current market value of your property. Note that the bank will likely use a valuation from an independent valuer, which might differ from the market value.
  2. Speak to Your Lender: Discuss refinancing options with your bank or mortgage broker.
  3. Calculate Your Available Equity: Use the 80% rule to figure out how much equity you can access.

Benefits of Using Equity

  1. Faster Portfolio Growth: Leveraging equity allows you to purchase additional properties without waiting to save for a new deposit.
  2. Increased Wealth: As you acquire more properties, your potential for capital growth and rental income increases.
  3. Tax Advantages: Interest on loans used to purchase investment properties is often tax-deductible. Seek advice from a professional accountant to fully understand these benefits.

Risks and Considerations

  1. Increased Debt: Borrowing against your equity increases your overall debt level. Ensure you can comfortably manage the repayments.
  2. Market Fluctuations: Property values can fluctuate, potentially reducing your equity. Always consider the long-term prospects of the market.
  3. Loan Costs: Refinancing or taking out a home equity loan involves costs such as appraisal fees, loan origination fees, and legal fees.

Final Thoughts

Using equity to buy more property can be a powerful and positive strategy for building wealth, enabling you to achieve your financial goals faster. By understanding the 80% rule and working closely with your lender, you can effectively leverage your existing assets to expand your property portfolio. It is a great way you can get ahead and potentially begin your property investment journey.

At Sharp Property Buyers, we’re here to help you navigate the complexities of property investment. Whether you’re a seasoned investor or just starting, our team can provide the guidance and support you need to make informed decisions and achieve your financial goals. For more information on how to leverage your property’s equity, contact us today.

Disclaimer: This blog post is for informational purposes only and should not be relied upon as a substitute for professional advice. Always conduct thorough research and seek expert counsel to ensure informed decision-making.

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Matt Sharp - Director

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