Using equity to buy investment property
A Guide to Using Equity to Buy Investment Property
One excellent strategy for financing your property portfolio is using equity to buy investment property. Using existing equity in your other properties, whether it is your own home or in another investment property, to finance a new property can be a faster and easier way to fund your investments than saving up money for cash deposits.
How does it work?
If you have equity built up in an existing investment property or your own residence, you can use this equity to borrow a deposit. Rather than saving for years to fund a purchase, you can take another step on the property ladder and start building equity in a new property straight away. The funds you might have saved up for a deposit can then be better directed to other avenues, such as property maintenance or covering purchase costs.
While using equity to buy investment property can be a great option, not every property investor has sufficient equity to finance a new purchase. If you do not have equity built up, another option for financing an investment property is using a guarantor to cover your deposit, and to take out a 100% loan.
Interest-only repayments and your investment strategy
The average mortgage repayment has two components: the principal, and the interest. As a property investor, it can be advantageous to opt for a loan where you only pay off the interest component for a fixed number of years. For example, you might choose a loan that lets you pay interest only for the first five or even 10 years of the loan duration.
In addition to using equity to buy investment property, paying interest-only for a fixed period of time can support you by freeing up cash for other investment projects. The amount of cash you free up by paying only interest can help you climb the property ladder much faster.
Sometimes it can be beneficial to have the option of being able to pay all your annual interest in advance. This can be a viable option if you expect to earn more than usual in a given financial year. You might decide to opt for this choice if you have realised capital gains this year and want to set these gains off. With some lenders you might be able to access discounts by paying all your interest off in advance; others may not offer this option.
Getting approved – the role of negative gearing and rental yields
Rental yields and even negative gearing can have an impact on how much you borrow and whether or not your loan is approved. Lenders take rental income into account, and often calculate the amount you can borrow by factoring in the amount of rental income the investment property is likely to attract.
Similarly, negative gearing can be factored into the application-approval process as well. Different lenders will weight these two variables in their own way; choosing the right lender and loan for your situation can make all the difference between a loan approval or having your loan turned down.
How to get started with the application process
If you are interested in finding out more about using equity to buy investment property and the different products and options that are out there, contact ABC Mortgages for a chat today. Our experienced team has the latest knowledge on the best products for property investors, so we can help you find the best product and features for your needs.