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How new investors can leverage equity

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How new investors can leverage equity

With home prices rising in value over the past few years, you might find yourself in a position where you can use that newly created equity to expand your property portfolio.

One of the most powerful elements of owning property is the ability to access equity and put it towards the purchase of an investment property.

If you’re thinking about starting to grow your property portfolio, this is how you can potentially do it.

Know the equity in your property

The first thing to check is that you actually have accessible equity in your property.

Lenders typically like to see that you can put down 20 per cent of the value of your home when you first take out a mortgage. Similarly, if you want to access the equity in your property, they will probably need to see that you have this amount.

If your property has increased in value since you purchased it while you’ve been making regular principal and interest repayments, you might be in a position where you have extra equity you can use.

Sometimes there is the ability to buy a home and refinance with less than 20 per cent equity through tools like Lenders Mortgage Insurance (LMI), however, it’s best to speak to a mortgage broker and compare your options if you are under that level.

Refinance

This strategy accesses the equity in your property by refinancing, which is effectively taking out another loan (or multiple loans) and paying out your current mortgage.

If you purchased a $500,000 property using a $100,000 deposit and the value of the home has increased to $800,000, you’ve seen an equity uplift to $400,000.

If you refinance the property, you can leave 20 per cent of the value of the property and potentially access up to $240,000 that you could put towards an investment property.

Tapping into your equity through refinancing is an incredibly powerful tool to expand your portfolio.

Use your equity

Once you’ve refinanced and freed up the equity from your property, you can use it as a deposit on an investment property.

The main consideration here is that you will still be required to service both the refinance and the purchase of another property.

For example, even if you can access $240,000 in equity, you might not be able to afford a million-dollar-plus property unless your income plus any rent you receive can support that.

If you do have the serviceability, you can choose the best way to move forward with growing your property portfolio.

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