How Ian and Sue used the equity in their home to purchase an investment property
The idea of becoming a property investor is one that appeals to many Australians but sadly often overlooked because of the misconception that it is only within the reach of the wealthy.
The reality is that with the right finance, planning and strategy an investment property may be within reach and easier to achieve than you think.
Ease the property investor deposit burden
One of the key challenges to breaking into property investment is raising a deposit, but there are solutions. Property buyers are typically required to contribute 20 per cent of the property’s value, and for some this can be a stumbling block.
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 down payment on an investment property.
I will use a client scenario to illustrate how borrowers can capitalise on the equity in their homes to purchase an investment property.
Property investor case study
Ian and Sue bought their 3-bedroom unit in 2009 for $447,000 putting down a 20% deposit of $89,400, and taking out the balance in a loan for $357,600. The couple recently decided that they’d look at breaking into the investment market so we arranged to meet up and discuss their options and finance.
We got a valuation of their home, and discovered that it was now estimated at $750,000. Over the years, Ian and Sue had paid off $150,000 off their original loan leaving $207,600 owing on the property.
Today’s valuation of the property, less the outstanding loan, left them with $542,400 worth of equity.
We refinanced their own home to the loan ratio of 50% of its value to free up some equity for an investment. Based on the current property value and after confirming that they could afford the repayments, they would be able to borrow $375,000. This provided an additional $167,400 available for investment purposes once we deduct the outstanding loan balance on their home.
This strategy appealed to Ian and Sue because otherwise they would have needed to liquidate their managed funds to raise the deposit for the investment property.
This allowed them to put down a 20 per cent deposit on a $675,000 two-bedroom apartment. The deposit came to $135,000 leaving the $32,400 to cover stamp duty and other expenses. They then took out an additional loan of $540,000 to cover the rest of the purchase price – a loan to value ratio of 80%.
Ian and Sue had a larger borrowing on their home and investment property, however through good research on finding the right investment property, the additional repayments are able to be covered by the rent the investment property is generating, and the property has long term capital growth potential. Additionally, by taking out an interest-only loan for the investment portion they can better manage their monthly outgoings and cash flow, and prioritise paying off their owner occupied home loan.
You will find more smart refinancing strategies here
Anthony Landahl | Equilibria Finance
Note: This article has changed the names of the client and some of the actual details for confidentiality.
Note: This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.