As your home grows in value and you pay off your mortgage, you are continually increasing the equity you own in your home, and with this comes increasing opportunities.
Beyond the security that comes with owning our own home, equity is the reason we fight so hard to get into the property market.
So what is equity?
If you take the current market value of your home and subtract the amount you still owe the bank, this is your equity.
As you make repayments and reduce your debt, your equity increases. The other driver is capital growth – as your home naturally increases in value in line with market forces, that gap between market value and your current home loan grows bigger.
For example, a house bought in Mitcham in 2014 for $760,000 is now worth $1,000,000 on average.
The equity in the property is, therefore, $240,000. This is clearly a large sum that would open up many opportunities for those looking to invest.
How can I use equity to invest?
Once your equity has developed, you can use it as proof of your financial security and apply for an additional loan. While many people use this opportunity to renovate or spend the money elsewhere, often on a holiday, a smarter choice can be to reinvest in the property market.
You can help to secure your financial future by essentially using your equity as a deposit on an investment property. This is a unique opportunity and one that continually pays off in the long term for Australian investors.
How much can I borrow?
It’s not recommended to use all of your equity to secure a new loan, and risk-averse banks won’t let you. Typically, banks will assess up to 80% of your equity as ‘usable’.
As a general rule, the banks will then loan you enough to purchase a property worth up to four times your usable equity. In our example above, that would be up to $960,000.
Key tips when investing
Make sure you can afford the repayments.
- Servicing two mortgages will clearly require more complicated financial management. Ideally, your new rental income will cover at least the interest repayments for your investment property, but at times you may find yourself needing to pay more, especially in the beginning.
Get sound financial advice
- There are many financial and tax implications when buying an investment property, and a whole world of possible tax deductions will open up but you’ll need to make some smart decisions. Getting the right advice early before making any commitments is essential.
Buy your investment property in a high growth area
- It is important to purchase your investment property in an area with high demand, even if it’s not somewhere you would choose to live. High demand means you can hopefully see immediate financial returns through rental income. It also means you’ll start to see equity building in your investment property as well.
Choosing the right suburb is where we Noel Jones can help. We know these parts of Melbourne extremely well, and can help you find a great property with high rental yield and strong growth opportunities.
We’ll start with finding the current market value of your house and work with you from there. If you’re ready to find out more about the equity in your home and what you can do with it, get in touch with your local Noel Jones office today.