So, you have an exisiting property and want to purchase your next without a deposit ? 

If you own property and are relying on your savings to buy a property, then we advise you to stop right now and keep on reading – especially if you didn’t take equity into account.

As you gain equity in your home, you can use it in order to build your property portfolio without having to save money. In short, it is a smart way that you can rely on to buy an investment property and through which you can avoid endangering your financial situation.

What Is Equity?

Simply put, equity is the difference between the current value of your house and how much you exactly owe on it. For example, if your house is worth $500,000 and you have $250,000 left to pay on your home loan, then your total equity is of $250,000.

The best thing about equity is that you can use it as security with the bank. Therefore, you can borrow against your equity and fund another big purchase. For example, you could either go on a holiday, buy a car, extend your home if needed, or start a business.

Obviously, equity can also be used to buy an investment property.

Total vs. Usable Equity

As you may know, you need to put a 20% deposit when purchasing a property and banks will lend you the rest of 80% of a house’s value. The same goes for equity – banks will lend you 80% of the value, minus the debt that you still owe. This is also called useable equity.

Naturally, as the bank lends you money against the total value of your home, they will not lend you a full amount.

In the example above, your total equity is of $250,000, while your usable equity is of $150,000.

The Process of Using Equity To Purchase Another Property

Get in touch with our office and one of our brokers will look into your overall borrowing position and calculate your borrowing power. Next, we will order complimentary valuations on your property to calculate the usable equity available. There are two main methods of approaching the new purchase using equity:

1. Offer your property with enough equity as second security with your new potential purchase, also called ‘Cross-Collateralisation’. Offering your existing property with sufficient equity lowers the Loan to Value Ratio (LVR) of the new loan, thus not requiring a deposit to be paid out of your pocket. The combined Loan to Value Ratio (LVR) must be below 80% to avoid paying Lenders Mortgage Insurance (LMI). This is a great way to avoid topping or changing your existing loan with your existing property. However, It is recommended to obtain independent advice from both a solicitor and accountant regarding the risks involved as both properties will be offered as security.

2. Drawing the required deposit from your existing property as a ‘cash out’ or as also referred as ‘topping up’ your loan. Subject to sufficient equity and standard application protocol, accessing the funds via topping up your mortgage eliminates the risk of having both properties being used as security for your new purchase. However, this will require your existing mortgage to be increased thus you’ll need to ensure your repayments and borrowing position are not thrown out of whack post settlement.

The Bottom Line

Basically, you just need your usable equity in order to purchase an investment property. You don’t need to save any more money or, even worse, take another loan. This is why, before dipping into your life savings, it is recommended to look into all of the options you have.

If you have any more questions about equity or need information about home loans and such, make sure to contact us. Our team will help you find the best loan for you or provide you with all the information you need to make a good investment. 

Simply reach out and contact us today – we’ll do our best to help you out!

Contact us on 02 8530 1107 or Submit your scenario online