Looking to build a property portfolio? The experts at Mortgage Choice provide their top tips on using equity.
Building a property portfolio remains a popular investment strategy for many Australians. This is particularly relevant at the moment as interest rates are at record lows, which means the cost of borrowing to buy property is the lowest it has been in a very long time.
However, there are many ‘mum and dad’ potential investors who question whether they can afford to purchase an additional property while continuing to repay their home loan. Using equity may provide a solution.
Often, people who have paid off all or part of their home borrow against the equity they have built up over time - the difference between a home's market value and the unpaid balance of the home loan - to finance the deposit for an investment property purchase.
It tends to be an ‘old school’ notion that repaying a home loan in full is a must-do before purchasing more properties. Homeowners who want to build a property portfolio quickly may consider this as this strategy enables them to capitalise earlier on the inroads they’ve already made with repaying their home loan.
A family home is the biggest financial commitment, and asset, many Australians will ever have. So why not put it to work while you work on paying it off?
Depending on how long you have been making repayments and the capital growth accumulated since purchasing, you may be able to use your home equity to increase your personal wealth.
Of course, how much you can borrow is subject to lenders’ serviceability criteria as well as the amount of available equity, which works as security for the investment loan. This means you don’t have to come up with a cash deposit. Keep in mind if you intend to borrow more than 80% of the total property value, ie. that of your home plus the investment property, you will probably be required to pay lenders mortgage insurance, which can be quite costly.
It is important to note this strategy does require you to take on a certain amount of risk. Before accessing your equity it is necessary to establish whether you can comfortably afford higher loan repayments and which, if any, lender is willing to lend to you. So, it’s clever to consult a financial and tax adviser then visit a professional mortgage broker, who can help you compare finance options and find a lender and loan product suited to your circumstances.
One way to help you build equity quickly is to consider making higher loan repayments. Many mortgage holders may be doing this already if they have ignored the recent rate cuts and kept their home loan repayments the same over the year.
The best way to go about repaying more is to regularly review the household budget, noting all aspects of the cashflow over a week, month, quarter and year. The next step is to calculate what you can truly afford and to stick to that limit.
For more information or help in utilising potential equity you have in your home contact Mortgage Choice on 13 6678 or click here