A home is one of the most valuable assets you can own.
Whether you live in it or have invested to lease it out, real estate makes up a big part of your wealth and investment portfolio. Aside from all of the cherished memories you and your family can make or the secondary income renting offers, the capital value of property also generally increases over time – potentially offering you a strong return in the long run. The moment you buy a home, you start building equity which can be used in the future to secure finance for a variety of things. But how does equity work?
As an experienced Buyers Agent, let me explain how home equity works and how you can use it to your advantage to buy another investment property.
What is home equity?
Home equity is the difference between the current market value of your home and your mortgage. For example, if your home is valued at $400,000 and you still owe $220,000 on your home loan, your current equity would be $180,000 – the difference.
Keep in mind, though, that your property’s market value can fluctuate – meaning, the equity you have in it may rise and fall.
So, what can you do with this equity amount? Great question!
Why is home equity important?
Your property equity can be a valuable resource as it can potentially allow you to fund investment home purchases. This means that the $180,000 in the example above can be “taken out” from your current home and used to contribute towards a second purchase. This is often how many people build strong property portfolios with multiple homes. However, it’s important to seek financial advice first to discuss your specific circumstances, as you want to plan ahead to get the best use of your home equity.
Nevertheless, if you want to utilise your equity, you want to grow its amount as much as possible to give you more leverage when buying another home. Here are some of my tips.
3 ways to grow your home equity
Over the years of paying down your mortgage, that gap increases and your home equity value grows naturally. If your current property market value increases, your equity will also increase. However, aside from these two, there are also a number of ways you can further build your home equity:
- Increasing your property’s tangible value
You can increase the value of your property through home maintenance and essential repairs. Renovating or remodelling parts of your home like floor replacements, adding a modernised kitchen or building a new bathroom are also good ways to increase your property’s tangible value. Just make sure that the project cost will not outweigh the anticipated added value of your property, as this will be counterproductive.
- Make larger or regular repayments
If you are repaying your mortgage on a monthly basis, you may consider making fortnightly repayments instead or paying additional contributions, if that works for you. This can help you grow your useable equity as it reduces your loan balance faster, together with the interest you’ll have to pay.
- Observe market trends
Sure, property tends to increase in value over time but certain local investments, government activity, demographics and suburb development can more significantly affect its value. Keep an eye out for potential future plans that may unlock future equity value above just the general value climb over time, and take full advantage then.
So, how can you use your home equity to buy?
Before we start discussing how you can use your home equity to buy an investment property, you might want to take note how much you can borrow from your equity. Using our previous example, if your property is valued at $400,000 and your mortgage is $220,000, then your useable equity would be around $100,000. This is typically 80% of your property value minus your mortgage.
In most cases, you will need to put a deposit of around 20% to get a home loan to purchase an investment property. This means, if you use your equity of $100,000 as a deposit, you could purchase an investment property worth around $500,000.
Remember, though, that having equity will not always mean that you can borrow against it. There are several additional factors banks will consider such as your income, age, the number of children you have and any additional debts.
It’s best to speak to property professionals first. As a Property Buyers Agent in Queensland, I help people just like you work out a plan and can steer you in the right direction. That will make it a bit clearer and then you can decide what best to do.
Are you planning on using your home equity for an investment property?
My team at Worth Property Investing can help you. As experts in the Australian property market, we can find the right property that will make the most out of your equity.
So, let’s start planning your next property investment and the ways in which we can support you.
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