Using Your Equity: No Cash Deposit Needed
Have you owned your property for 5-10 years and are now considering your next financial move? If so, it might be time to consider whether an investment property could be part of your retirement strategy. Many homeowners overlook the potential of leveraging their existing home to purchase an investment property, which can be a valuable asset for your financial future.
Keeping Your Existing Home and Buying a Rental
One viable option is to keep your current home and buy a rental property for investment purposes. This strategy allows you to stay in your current home while investing in alternative real estate.
There are many ways to hold on to your existing property and purchase another one – it depends on what you are hoping to achieve. Expect to be measured on serviceability and loan-to-value ratio (LVR). Serviceability refers to your ability to meet loan repayments based on your income, expenses, and any existing debt obligations. LVR is the ratio of the loan amount to the value of the property and is crucial in determining how much you can borrow. Most lenders have specific LVR requirements, currently to purchase a newly built investment property, you would need 10% deposit, or to purchase an existing property you would need 30% deposit.
It will often come down to the numbers, and sometimes you can use equity within your existing home to your advantage. If you have built up substantial equity, this can be used to fund your investment property purchase, reducing the need for a large upfront cash deposit. See more detail below on how to effectively use your home equity for investment purposes.
Using Your Equity: No Cash Deposit Needed
One of the advantages of this strategy is that you can use the equity in your existing property without needing to put down a cash deposit for the investment. Here’s how it works:
If you own your own home valued at $1 million and currently owe $500,000 on it, you can leverage up to 80% of the property’s value. This means you can potentially borrow up to $800,000 against your home. Since you already owe $500,000, this leaves you with $300,000 in usable equity that you can top up your home loan by.
This $300,000 can then be used as a deposit towards an investment property. With this amount, you could potentially purchase an investment property worth up to $1 million based on an LVR of 70%. Or, this could be used to purchase two investment properties for $500,000 each. This strategy enables you to expand your property portfolio without needing to find additional cash for a deposit.
For those considering new builds, the lending criteria can be even more favourable. For new build properties, lenders often allow up to 90% lending. This means you can leverage more against the value of the new property, providing greater flexibility in your investment options.
Different lenders have varying criteria when it comes to investment properties, including how they assess serviceability. They will consider factors such as potential rental income, property type and fixed costs associated with the property. It’s crucial to understand these requirements to ensure you meet the necessary criteria for securing a loan – something we can help you with!
The Perks of Owning an Investment Property
One of the advantages of owning an investment property is the potential for growth. Over time, your investment property can appreciate in value. This means that while you’re paying down the home loan, your property’s value is likely increasing, contributing to financial wellbeing.
Additionally, an investment property can be a great way to supplement your income during retirement. The rental income generated can provide a steady stream of funds, helping to support you when you decide to step back from the workforce. This extra income can make a difference towards financial freedom and security in your retirement years.
At Connect Me Mortgages, we are here to guide you through the process of considering an investment property as part of your financial strategy. With our expertise and personalised advice, we can help you make informed decisions that align with your goals.
Reach out to us today to explore your options and take the next step towards securing your financial future.
Lending criteria are always subject to change. The information contained in this blog is not tailored mortgage advice; please contact a Connect Me Mortgages Adviser to get tailored mortgage advice for your own financial position.