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18
Oct 16

Investment Property Financing With The Use Of Your Home Equity

Realise your property investment goals through capitalising on the equity built up in your home.

Property investment appeals to many Australians but is sadly often overlooked because of the misconception that it’s only within reach of the wealthy. However, with the right finance, planning and strategy, an investment property may be easier to achieve than you think.

Ease The Deposit Burden

A key challenge to property investment is raising a deposit, but there are solutions. Property buyers are typically required to contribute 20% of the property’s value, which can be a hurdle. But existing home owners may be able to unlock equity – or the increased value – that’s built up in their own home to cover some or even all of the deposit on an investment property.

Example:

Dan and Jessica bought their home in Rockhampton in 2003 for $247,000. They are paying a $49,400 deposit and securing a loan for $197,600. They decided they’d like to enter the investment market so contacted their mortgage broker to discuss finance. Their broker suggested they get a valuation of their home, which revealed it was now worth $480,000. Dan and Jessica had paid $48,000 off their original loan leaving $149,600 owing on the property. Today’s valuation of the property, less the outstanding loan, left them with $330,400 worth of equity. Their broker suggested they consider refinancing their own home to the loan ratio of 50% to free up some equity for an investment. Based on the current property value, they could borrow $240,000 – making an additional $90,400 available for investment purposes. They put down a 20% deposit on a $350,000 two bedroom apartment and took out an 80% loan. The deposit came to $70,000 leaving a further $20,400 to cover stamp duty and other expenses while a $280,000 loan covered the rest of the purchase price. Now that Dan and Jessica had a bigger loan on their home their repayments had gone up. But the repayments on their investment property were almost covered by the $385 weekly rental the investment property was generating. By taking out an interest-only loan they also minimised their monthly outgoings and improved their cash flow.

You may also be able to realise your investment goals by putting your current property to work for you.

Help For First-Time Investors Through LMI

First-time buyers can also crack the investment market without having to scrape together a huge deposit. Traditionally lenders would look for a 20% deposit from property buyers but today it’s possible to borrow up to 95% of a property’s value with the help of lenders mortgage insurance (LMI). LMI protects the lender against the risk associated with providing borrowers with a higher percentage loan in the event that they default. The cost of LMI can often be added to the overall loan amount, reducing the initial outlay.

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