Equity is the value that you have in your home after you have paid off your mortgage.
For example, if you have a home and it is valued at $1,500,000 and you have a $300,000 loan then the current equity would stand at $1,200,000.
You can refinance your home loan to use your equity for deposit and costs for an investment property so long as you have the financial capacity to service both loans. Pro Tip – The income from the new investment property is added to your regular income to assess your new borrowing power.
Generally, if you lend more than 80% of your home value you will have to pay Lenders Mortgage Insurance. This is an insurance you pay on behalf of the banks to insure them should you fail to pay your loan.
In the above scenario of a home valued at $1,500,000 with a $300,000 loan and $1,200,000 of equity; to see how much equity we can use for a new property and assuming we do not want to pay LMI, we would multiply the $1,500,000 value by 80% which would give a figure of $1,200,000. Then we would deduct the loan of $300,000 giving a final figure for “Useable Equity” of $900,000. This is the amount available to you to refinance and purchase your new investment property (subject to your capacity to service the loan).
Investors should always be looking for ways to make their investments work as hard as possible. Having “lazy” equity in your home doing nothing for you could cost you a lot of wealth over the long term. Depending on your investment strategy, using some of the equity built into your property should be considered.