How to use equity to invest in property
22 November 2023
Are you interested in purchasing an investment property but don’t have cash in the bank for the deposit?
Using equity to invest in property can be a powerful tool that allows you to make a purchase without putting down a deposit. This approach removes one of the biggest hurdles of property investment, potentially accelerating the growth of your property portfolio and create long-term financial security, preparing you for a wealthier retirement.
Equity in a property is the value of the property minus any outstanding mortgage or other debts secured by the property. Equity gives you borrowing power to access the equity in your home to use as a deposit for an investment property.
You can use a home equity strategy to buy property after property, which diversifies and expands your portfolio. The more properties you buy, the more equity you can accumulate.
Home equity vs Usable equity
There are two types of equity: home equity and usable equity.
- Home equity is the difference between the market value of your property and the outstanding balance on your loan.
- Usable equity refers to how much you can access, typically up to 80% of the value of your home minus what you still owe your lender.
You can access this equity without selling your home, using your existing property as security on the new loan, known as cross-collateralisation. The amount of usable equity depends on your lender and is determined by your income, debt, living expenses, age, household situation, and employment.
The power of leverage
Building a powerful portfolio doesn’t take long when you leverage your equity to invest in property. To be successful, always keep your long-term goals at the forefront of your mind and make strategic data-driven decisions.
Buying an investment property with equity helps your cash flow by freeing up funds you’d otherwise use as a deposit on a second home.
However, paying more than one monthly mortgage can be costly and confusing – and decisions you make about one loan or property may impact the other.
Maximising your equity to build your property portfolio
Building equity is a gradual process that unfolds over several years. The growth of equity is contingent upon diminishing your outstanding loan through regular repayments and capitalising on increases in the property’s market value.
To optimise the benefits derived from your equity, it is advisable to adopt strategies aimed at enhancing your home’s value and effectively managing your mortgage. These may include:
1. Paying more than the minimum required on your mortgage repayments
By making extra loan repayments, and making Principle & Interest repayments, you can reduce the size of your loan sooner and increase equity in your home.
2. Choose well-located properties
You can build equity in your property porftolio by choosing well-located properties, ensuring not only favorable rental income, but also promising prospects for capital appreciation.
2. Invest in high-return renovations
Complementing property value appreciation resulting from long-term capital growth, you can boost the overall value of your property by undertaking strategic renovations, such as enhancing the kitchen, bathroom, and adding features like a pool.
3. Refinancing when interest rates are lower
Seizing the opportunity when interest rates are lower, you may choose to refinance your loan, potentially with a different lender. This involves a comprehensive home loan application process, including property valuation.
The new loan serves as a means to unlock equity in your home, which can be utilised as a deposit for acquiring an investment property. The funds from the new loan are utilised to settle the existing loan with the current lender, and any surplus can be directed toward the purchase of the investment property.
What to consider
While there are many ways to access equity to invest in property, it’s important to be mindful of the associated costs and tax implications, which will vary depending on individual circumstances.
Building equity is a long-term strategy that requires careful planning, particularly given the fluctuations in the property market. Therefore, making well-informed decisions that align with your financial situation and goals is crucial.
Having a long-term wealth creation strategy in place and gaining a clear understanding of choosing quality properties with growth potential, loan options, taxes and any extra fees and charges to minimise any potential impacts on your lifestyle.
This is where Wealth Street can help.
We understand navigating property investments and financial planning can be overwhelming.
At Wealth Street, we do all the research for you by offering tailored investment strategies that will increase your net worth, reduce your debt, and give you peace of mind that comes with long term financial security.
Every success story starts with a leap of faith. Start a conversation with us.