What is equity and how can I use it to invest in property?

If you want to start investing in property, but don’t think you have the cash for a deposit, take another look. The value inherent in your family home is a form of savings and can start you on the way to a handsome property portfolio with all the advantages, such as negative gearing and a steady passive income, that this implies. You can use equity as security with the lender and borrow against it.

Chances are you have been paying off the mortgage for quite a few years. These payments, combined with the capital gain that has accrued as the house’s value has increased, means that you most likely have quite a lot of equity in your home that you can use as collateral to secure an investment loan.

An equity loan is often referred to as a second mortgage. When you understand what equity is and how to use it, you are well-positioned to take advantage of market opportunities.

Equity is the difference between the market value of your home and what is owed on it. You can use up to 80 per cent of this amount as deposit on another property. Lenders won’t lend the full amount because if house prices dip, they don’t want an outstanding loan that is worth more than the asset.

Equity increases in three ways – through capital growth, through the payments you make off the mortgage, and through improvements that you have made to the property.

How to calculate equity

If your home is worth $1 million and you owe $500,000, then your useable equity is $300,000 (80% of $1m = $800,000-$500,000).

Borrowing no more than 80 per cent means that you do not need lenders mortgage insurance.

To get an idea of the value of the investment property you can purchase, a simple rule is to multiply your useable equity by four, eg, $300,000 X 4 = $1.2million.

For more information about using the equity in your home, and for expert property investment advice, book a free consultation with the team at St Dane Property Solutions: www.stdaneproperty.com.au

 

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