It’s difficult to pay off a mortgage and save a deposit for an investment property. Fortunately, you can use the equity in your home as a deposit. You’ll need to refinance your current home loan to access your equity.
How Does Equity Work When Buying An Investment Property?
Equity is the difference between your home’s current value and the amount you still owe on your mortgage. Equity increases in two ways:- When your home value appreciates
- When you start paying off your home loan and reduce the balance owed
How Can I Access Equity?
- Through cash-out refinance: This is where you cash out your money through a home equity loan. You get your home valued and the bank assesses the amount of equity available.
- Through a line of credit: This is where you apply for a line of credit home loan. A line of credit acts like a credit card that uses your home as security.
What To Consider Before Refinancing To Invest
There are a few things to do and consider before you refinance your home loan to buy an investment property.- The first thing you need to do is find out the current value of your property. We can help you get free valuation reports. When property prices increase, you might have access to more equity than you originally thought.
- Then make sure that you have enough equity in your home. You will need at least 20% equity to refinance, and more if you want to avoid paying Lenders Mortgage Insurance (LMI).
- Once you have determined that you have enough equity, compare refinance rates and terms from multiple lenders to find one that offers a competitive interest rate and has the features and services you want.
- Remember, once approved, you are paying off two loans: your new home loan and the investment loan.
What Are The Benefits Of Refinancing To Buy An Investment Property?
- You save time and money by not having to save a significant deposit.
- You save thousands of dollars in LMI fees.
- You earn rental income.
- Since you’re refinancing, you can lower the interest on your current home loan
- You can diversify your investment portfolio.
What Are The Risks Of Refinancing To Buy An Investment Property?
- There is no guarantee that property prices will always increase; so the equity you can access might be lower than you anticipate.
- If the investment property is vacant or untenanted for too long, then there won’t be rental income to cover mortgage repayments.
- You will be juggling two debts: a refinanced mortgage and an investment loan. Lenders will check your borrowing power and financial situation to ensure you can afford to repay these loans.
Should I Pay Off My Home Loan First Or My Investment Loan?
When you pay off your home loan, you’ll have a roof over your head, while paying down your investment loan will give you more cashflow and equity.When Should You Pay Your Investment Loan First?
- If you have negative cashflow, paying off your investment loan sooner can convert the asset into one with positive cashflow.
- If you are considering retirement, paying off your investment loan will increase your monthly cashflow.
- If the interest rate on your investment loan is significantly higher than the one for the home loan, consider paying the rental property off as a priority.
- If you plan to convert your owner-occupied property into an investment property in the future and want to sell your current investment property soon, consider paying it off first.
When Should You Pay Off Your Home Loan First?
- If you are just starting to pay off your home loan; when you make extra payments on your mortgage early in the term, compound interest has a greater impact.
- If you owe more than 80% of the property value; you will have to pay LMI if you refinance at a higher LVR.
When you’ve decided to refinance your home loan to buy an investment property, we can help you determine how much equity you can use and get you an investment loan that suits your financial goals. Call us on 1300 889 743 or enquire online today.