If you’re actively looking to buy your next investment property by using some equity in your current portfolio, there are a few things you need to know before you dive in.
First of all, the good news:
As you probably know, equity allows you to have your cake and eat it too.
It means you can extract some value out of one or more of your current properties, without having to sell the asset and lose the potential to benefit from it’s future growth.
But how much should you borrow, and what is the best LVR to borrow up to?
We know that we can usually refinance our properties and extract equity of up to 80% LVR with no lenders mortgage insurance being payable.
We also know that to purchase an investment in the current market, we’ll generally need a 20% deposit, plus an extra 5% for acquisition and closing costs like stamp duty, insurance, legal fees, bank fees and the rest.
For many people, 80% is the “magic percentage” they use when calculating the numbers on a potential deal.
But it’s not always the ideal amount to use when leveraging your equity.
Let me explain why…
Let’s say you have an existing property that is valued at $500,000.
Eighty per cent of this value is $400,000.
You have an existing loan on this property of $300,000, so you can extract $100,000 without paying LMI.
All looks great so far.
This allows you to spend around $400,000 on another investment property, assuming you’ll invest $80k as the 20% deposit, and set aside $20k to cover buying costs.
Do you have any other options?
Of course you do!
What if, when you refinance, you borrow a smidge more on your existing property – say 82.5% – to free up a little more equity?
And what if you borrow a little more against your new property – up to 85% – so you can afford a slightly pricier, better quality blue-chip investment?
And even with the changing lending climate, many lenders are allowing these types of loans.
The thing that many people don’t realise is that the really expensive LMI premiums kick in once you hit the 90% LVR threshold.
That’s when you hear stories of people paying $10,000, $15,000 and even more on LMI in order to secure loan funding.
But when you start playing with the figures at the lower end the scale, hovering close to the 80% band, just tweaking your LVRs slightly when redrawing equity can open up a whole new world of options for you – often for a very small outlay on an LMI (which, let’s not forget, is tax deductible).
This is just one example of why it’s important to have a smart, experienced mortgage broker on your team.
They can run the numbers for you on a number of different scenarios to show you how you can best leverage your equity and have your money working as hard for you as possible.
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