A second property can be a great investment option, but the expectations and requirements for a second property are very different from that of the first. If you don’t have a substantial deposit saved up, you might think you’re out of the running entirely.
The good news is that the equity in your current home can be the right tool to help you achieve your second property purchase. Equity is found by taking the value of your home and subtracting what you still owe on your mortgage. It can be a great asset, but you need to evaluate your personal circumstances and preferences before using it.
The first thing you need to do is calculate how much equity you can put into a second property purchase and whether this will impact your future financial goals. In this article, we’ll look at how to assess your equity and how you can apply those numbers to a new property.
Property owners typically access their equity by refinancing their mortgage. (When you change your current home loan, you can pull out the equity during the transaction.) Most of the time, the equity amount is placed into an offset account that can be used to pay the deposit on the second property.
When you use equity for your deposit, you’re borrowing against the value that has been built overtime in the first property. The monthly payments will increase when you refinance because the loan amount increases by taking out that equity. Before starting the process, consider the value of your current home against the potential value of the second home. Do you have enough equity to justify the decision? How much money do you stand to make from the second home? How are home values changing in the neighborhoods of each property?
While there’s no doubt that owning two properties translates to more responsibility (and additional debt), owning a second property can result in a steady stream of income from rental payments.
Shore Financial is here to help you both evaluate the benefits of a second property and recommend a home loan that matches your financial situation.
Refinancing or simply restructuring your existing home loan can allow you to borrow some of its equity. In most cases, you’re limited to refinancing up to 80% of the home’s value, unless you pay Lender’s Mortgage Insurance (LMI). This limits the amount of home equity that you can take out.
So, if a property owner’s primary home is worth $1,000,000 and they still owe $600,000, then their equity is $400,000. The maximum lending value (without incurring LMI) is 80% of the value of the home, or $800,000. Since the balance of the loan is $600,000, refinancing gives an owner the ability to use $200,000 as a deposit on their second property subject to affordability of borrowing this extra amount. If the property owner needed more than $200,000 for the deposit on the new property they would need to consider borrowing above 80% LVR on the existing property which will incur LMI costs. This is a type of insurance policy that benefits the lender in case the homeowner defaults on the loan.
It’s worth noting that once you have established equity for the deposit of a second property you still then need to borrow the remaining funds to complete (commonly 80% of the purchase price) agaisnt that new security. So if the new purchase was $800,000 you would use the $200,000 equity shown above for the 20% deposit and stamp duty and then borrow the remaining $640,000 (80%) against the new property.
Real estate investment is considered one of the wisest moves you can make when it comes to maximising your income. You’re diversifying your investment portfolio and could be opening the door to a substantial second income or capital growth overtime in preparation for retirement.
In addition, you are entitled to some tax benefits (albeit minimal). If you use your equity as the deposit, you won’t need to pay tax on that withdrawal. You can also deduct interest charges on the loan.
Value appreciation is another benefit. Property values generally increase over time, making your second home a lucrative financial investment if you are in it for the long term.
The point of a second property is to give you more options when it comes to protecting your financial future. Whether you want to rent it out for the long-term or just until the market balloons, you’ve made a valuable investment that can be used to build wealth however you choose.
If the time is right for you to purchase a second property, but you don’t have quite enough equity in your current it might be smart to boost the equity in your current home before you pull it out in a refinancing.
To do this, consider the following options:
Every homeowner has unique circumstances. The best way to boost your home equity may vary from one person to the next, so consider your goals and resources before choosing.
Understanding the value of equity and how you can use it to your advantage can be transformative to your future. If you’re considering another property to serve as a second income stream or a long-term retirement strategy, you could tap into that equity to get you there.
Shore Financial’s experience in second property purchases and accessing equity has earned us a reputation as a trusted home loan expert. We can point you in the right direction to make informed decisions about your mortgages, so you can invest your equity wisely.
Get in touch with the experienced and knowledgeable team at Shore Financial today for sound financial advice that you can trust.