Got assets? Leverage your equity to invest in property
For a long time, the Australian public has held the view that “cash is king”. Cash is the basis of most day-to-day financial transactions. It pays our wages and our bills. And while it’s not clear who first coined this phrase (pun intended!), its meaning for investors is clear: if you don’t have sufficient cash on hand, you won’t be able to seize investment opportunities when they arise.
Don’t be alarmed—it’s not entirely true! Mortgage brokers and lending providers know that cash poor doesn’t necessarily mean you’re not wealthy. It’s often the opposite. Many investors have money locked up in assets that deliver great returns over the long term, but which can’t be quickly converted to cash. Your home is a prime example of such an asset, which is why lenders are willing to consider the equity in your current home when it comes time to build your property portfolio.
Here are three ways you can leverage the equity in your home.
1. Using equity as security for a deposit bond
A deposit bond lets you secure a contract of sale for a property at today’s prices, without needing to pay anything to the developer until the settlement date. If that settlement date is more than six months away, you’ll need some security for the deposit bond to be issued, and the equity in your current home can provide that security. You may also be able to use the equity in your home as security for a bank guarantee, but this option usually incurs ongoing service fees in addition to the establishment fee, and ties up your cash in a term deposit for longer settlement periods.
A deposit bond gives you more time to save your full deposit. And you won’t need to tie up your incoming cash, reduce your offset balance, or redraw from your loan account, so you’ll keep that equity you’ve worked so hard to build.
2. Converting equity into a 10% cash deposit
Another way to leverage the equity in your home is to convert some of it into a cash deposit. If you’ve been paying more into your home loan account than the required minimum repayment, you’ll be able to redraw that cash and put it towards your 10% deposit. Otherwise, you may be able to refinance or extend your mortgage to free up a 10% cash deposit for your next investment property.
3. Using equity to apply for a 100% loan
Lenders generally require a guarantor for loans that are higher than 80% of the value of the property (referred to as a loan to value ratio or LVR of 80%). However, if the apartment is already complete and you have sufficient equity in your existing home, you may be able to apply for a loan for 100% of the property value. Keep in mind, however, that you’ll end up paying more interest over the loan term than if you’d had a higher deposit. This is just one of many alternative methods available for you and it may be worthwhile exploring this option with an experienced property consultant.
How hard is it to leverage the equity in my home?
If you’ve got an experienced and knowledgeable mortgage broker to guide you through the process, it doesn’t need to be difficult at all. That’s why First Class Lifestyle partners with some of the best mortgage brokers in the business—to help you leverage your home equity to build your property portfolio. Get in touch to find out how you can use your equity to maximise your property portfolio or click here to view our range of apartments and house and land packages.
Disclaimer: The information contained in this article is for information purposes only and cannot be relied upon. You should seek professional advice tailored to your specific personal and financial circumstances.