Unlocking the Equity in your Home, to Invest in more Property

It’s no secret – South East Queensland is currently one of the hottest property markets in Australia, with residential property values increasing by more than 30% per annum (and in some parts of the Gold & Sunshine Coasts it’s been much higher!).

Have you missed the boat to buy more property? Well, with record levels of interstate migration expected to continue on for the foreseeable future, combined with an ongoing shortage of supply, you’ll be hard-pressed to find a property pundit, demographer or economist, who’ll forecast any headwinds for SEQ – even though they’re talking about that for the southern states.

I could carry on all day about macro-economic factors that drive the property market, but I’ll leave that for another day. The question being answered today is:

How can you leverage the equity you’ve built up in your home during this boom, to buy an investment property?

If you own your home, there’s a pretty good chance it’s now worth a fair bit more than what you bought it for. Let’s do some simple maths:

  1. Own a property somewhere in SE Qld? If yes, it’s probably gone up in value by at least 30% in the last year…
  2. Let’s say you bought your home only 12 months ago, let’s say for $1,000,000…
  3. It therefore may well now be worth at least $1,300,000…
  4. So you have at least an extra $300,000 in equity in your home, versus 12 months ago (bought more than 12 months ago and it could easily be a much bigger number!)…
  5. For most residential properties, the standard maximum LVR is 80% (or 90+% with Lenders’ Mortgage Insurance), so:
  6. If got your loan 12 months ago at an 80% LVR, and your property has gone up in value by $300,000, you can theoretically borrow an extra $300,000 x 80% = $240,000.
  7. That $240,000 could be the 20% equity contribution to your next purchase, so the calculation for that could be:
  8. $240,000 divided by 20% =
  9. The 20% deposit on a $1,200,000 purchase (slightly less if you also want to borrow for the stamp duty on the purchase)

That’s right. Even if you only bought your house 12 months ago, you probably have enough equity to be the deposit on an investment property that’s worth even more than your current home!! Owned longer than 12 months ago and/or had a lower LVR on your loan than 80% = you can probably do even more.

But can I afford the Mortgage on an Investment Property?

This is definitely the key question that you should be thinking about. Rest assured, it’s the one that we as brokers – as well as the lender that you decide to go with – have a legal obligation to assess in detail, to make sure that you don’t get into something you can’t afford.

You’re naturally going to rent out the investment property you buy – which will of course go towards paying the new mortgage.

The law requires us and the lender to assess your ability to meet the repayments when interest rates are significantly higher than what they are today (as high as about 6% actually!); even if you get an interest-only loan, the assessment has to be done as if it were on P&I (principal & interest) repayments.

Owning a property also comes with expenses – e.g. council rates, insurance, the rental agent will take a clip. If you buy an apartment or townhouse, you’ll also be up for body corporate; if you buy a house you might save on that, but if it’s an older house then you’ll sooner or later be up for repairs & maintenance bills.

What exactly all of these numbers add up to, depends on the property you look to buy. Generally speaking, high-end properties (over say $1.5m in value) tend to get lower yields (rental income relative to property value), but they often go up in value more amidst a strong market – so these types of investments are often preferred by people that have high incomes, but aren’t so well suited for investors who are heavily reliant on the rental income.

That all goes to say – there is no single best investment strategy – it really is a case of working out what is most appropriate for your personal circumstances.

This is where we can help, by looking at your own financial situation and running the numbers.

With clarity as to what you can afford to borrow, you can then work out what to buy!

Next question is – what do you buy, and how? Amidst such a strong market, we’ve been seeing a significant increase in the number of people using Buyer’s Agents to help them buy a property. We have relationships with some really good ones, so don’t hesitate to ask. 

Once you have added to your portfolio, you can then use any further valuation increases to “rinse & repeat” with further purchases. If the market’s current rate of growth continues, you may find you’re able to access more equity quicker than you think.

You may of course also be able to leverage your equity to improve your existing home, further improving its value (and of course being able to personally enjoy the benefits!).

There are numerous strategies you can utilise when leveraging your equity, and our team can assist you in not only understanding them but also executing them.

If you’d like to learn more about this article, don’t hesitate to get in touch with us.

  • Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
  • STAC Home Finance Pty Ltd (534124) is authorised under Australian Credit Licence 389328.
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