Buying a rental property using your home’s equity
You’ve been in your home for a while now, and you are starting to think about expanding your property portfolio with your first rental property. But how does it all work, and can you use the equity in your existing home to put towards your investment?
When it comes to buying a rental property, it’s likely you will need at least a 35% deposit (unless you are buying a new build in that case it is 20%). Since you already own a home, you will most likely have some equity in the property that you have built up over time, and some of this can be used towards the rental property.
Equity is created in two ways: You’ve paid off some of your principal (the amount borrowed) over time, or your home has increased in value; either through the market going up in value or through home improvements.
When it comes to using equity to buy a property, it’s a good idea to speak with a Mortgage Advisor as there are a few ins and outs. Generally you can’t use all of our equity for another property - the banks will generally expect you to leave at least 20% of your current properties value.
It’s also important to remember that you can only use the equity in your property to buy another property, if you can service the loan. This is where it’s essential to work with a mortgage advisor to ensure you are meeting all serviceability requirements, that the equity is leveraged to your advantage, and the loans are structured correctly.
To really get our heads around how equity works, let’s take a look at an example.
- Home value = $1,000,000.
- Current mortgage = $400,000
- Equity = $600,000
If you meet the serviceability requirements, the bank will most likely allow you to borrow up to 80% of your home's value, which in this example would be $800,000 (80% of $1,000,000).
Since you already owe $400,000 on the mortgage you will a usable equity of $400,000 to use to fund the deposit on a rental property ($800,000 - $400,000 (mortgage) = $400,000).
If you are looking to buy an existing property then you will need a 35% deposit, so you can look at a property up to around $1,100,000.
The above information all relates to a borrower buying an investment property and staying in the home that they are currently living in, however we get a number of people wanting to rent out their current home and buy a new one. This can get a little tricky, as often once the bank is advised that the current home is set to become an investment property, they restrict the LVR (loan to value ratio) to 65%, so the lending on that property cannot exceed 65% of the property’s value. This can seriously restrict the amount of equity that can be used, so we recommend speaking with us first as there are a few options we can consider in this scenario.
Buying your first rental property is exciting and a great way to increase your property portfolio and set up a successful financial future. It does require getting the right advice based on your individual situation and goals, and that’s where our Queenstown based mortgage advisors can help. We know the local market and the ins and outs of buying a rental and can help you navigate this investment buying journey. Call us on 03 441 1307 or click here to get started.