How to buy property with equity

The need to completely pay off your first mortgage before you buy a second is a myth. Using your current home’s equity can unlock a multitude of financial options, allowing you to tap into more aspects of the real estate market.

Buying any property, whether it’s your first or tenth, is a huge life decision and you need all the facts at your disposal to come out on top. We’re going to go through exactly what equity means and how it can benefit you and your property wealth.

What is equity?

Equity is the difference between the value of our property and how much you owe on it.

For example:

You bought your current home for $500,000 and you’re eligible to borrow up to 80% ($400,000) of the property’s value from the bank to avoid paying Lender’s Mortgage Insurance (LMI). This means you have $100,000 in equity (the value of his 20% deposit).

Over time as you pay off your home loan, your equity will increase, assuming the value of your home doesn’t decrease. So, as the debt decreases, your equity will increase. In addition, if your property increases in value over time, you will have more equity available.

How can equity help me buy another property?

The great thing about equity is that you can use it as security for another bank loan, freeing up funds that can be used as a deposit on a second home, with your existing property acting as a security on the new debt. This can also be referred to as refinancing your home.

Banks typically lend people 80% of the value of the property. Since the bank is lending you money against the value of your home, they won’t lend you the full amount because if the house process dip, they want to avoid any outstanding loans worth more than your property.

Growing your property portfolio looks different for everyone. You can:

• Keep your home as an investment and use the equity for a deposit on a new home and rent out your first home to pay back the mortgage on the second home.
• Use the equity to buy an investment property, stay in your current home while growing your property wealth.

What next?

As your property conveyancers, we can only give you legal advice, not financial advice. We recommend speaking to your bank, financial advisor and/or your mortgage broker to gain an accurate picture on your financial situation.

For advice on the legal side of your property portfolio and support during every aspect of the buying and selling phases of your homes, talk to our experienced team at Impero Conveyancing.