Are you planning to buy your next home?
Even if you have purchased a home before buying next home comes with many challenges such as deposit, where to buy, processes etc. You may want to upgrade your family home or planning to create wealth using property investment strategies, leveraging equity from current property can be a powerful strategy to buy your next one. Here’s a breakdown of how it works:
Accessing your equity explained
There are two main ways to access the equity you’ve built up in your current property:
Refinancing: This involves replacing your existing mortgage with a new one for a larger amount. The difference between the new loan amount and what you still owe on your current mortgage is the cash you can use for the deposit on the new property.
Home loan top-up: This is similar to refinancing, but you’re increasing the limit on your existing mortgage instead of replacing it entirely. The additional amount you can borrow is added to your current loan balance. Mostly we suggest the equity loan is setup as separate split so you can reconcile easily to work out which loan belongs to which property.
How much equity can you use?
Generally, lenders allow you to borrow against 80% of your current property’s value.
For Example, let’s say your current property values at $900,000.
Then you calculate your equity by subtracting your current loan balance from the total value. For example: If your loan balance is $300,000, then you have equity of $600,000, as equity is the difference between the market value of your home and the amount you owe.
Next, calculate your useable equity. As stated above lenders are generally comfortable lending up to 80% of the value of your home, minus the amount you owe to the bank. In our example, 80% of $900,000 is $720,000, so the useable equity is $420,000.
Lets say the next property you are looking to purchase is $1,000,000 and you need a deposit of 20% plus cost, that will be approximately $260,000. Based on the calculation above you have more than the required amount in the useable equity to purchase this property.
This is how you you can leverage the equity in your home as a deposit on your next property, subject to you will be able to meet servicing of the lender you will be using to borrow.
Benefits of using equity
Buy your next property sooner: Using equity helps you to buy your next property sooner. In example above the deposit required to purchase next property is around $260,000 and that can take a long time to save. However you may notice the property prices have been going up much quicker which means that your equity has been building faster than your savings. And you can use that equity as the deposit.
Smaller down payment: By using equity, you can potentially put down a 20% deposit on the new property plus costs, avoiding Lenders Mortgage Insurance (LMI) which can save you money.
Potential for growth: Owning multiple properties can be a good way to build wealth if the property market increases in value. These steps can ben repeated as the value goes up to acquire multiple properties.
Getting started
If you would like to discuss further regarding the process of equity release to buy your next property, please contact our broker Anup directly and we can arrange a time to discuss.
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