Property investment can be an excellent way to build capital growth and secure your finances for the future.
But for those ready to take the next step in their property ownership, the many choices and decisions can be quite daunting.
Refinancing and leveraging equity can be a helpful stepping stone towards purchasing your investment property, but without educated and well-executed decisions, this option can end up costing home-owners more money and in turn they face to lose not only future investments but also their existing properties.
Every person considering this really should approach a property savvy finance strategist to ensure you get your “ducks in a row” and that your desired goals can be matched in an orderly fashion against the requirements of the day (and more importantly, the future!).
What is Equity?
Equity is the difference between the value of your home and the principal amount you have left on your mortgage.
You can use this equity as security with the bank to borrow more against it to buy property investments.
But you can’t borrow against all of your equity, only a certain proportion is useable.
Generally, banks will lend you 80% of the value of your equity.
This ensures that if property prices drop, the amount you owe will never exceed your property’s value.
But, it may be possible to lend beyond 80% (up to 90% or even 95% in some circumstances) by taking out Lenders Mortgage Insurance (LMI).
The Benefits of Leveraging Equity
Equity allows you to borrow more than you would otherwise be able.
The equity in your property gives lenders security over your property and allows you to borrow more money to invest further.
For example, you might buy a property for $400,000 by putting down a 20% deposit of $80,000 and borrowing the remaining 80%, which is $320,000.
The property could increase in value over time by an extra $100,000.
Your 80% mortgage is now only 64% of the value of your home and that isn’t putting into consideration any of the principal amount that you’ve already paid off.
You then decide to use this equity and refinance the home loan to 80% of the current value of your property – $500,000.
This frees up $80,000 of cash that you can put towards a deposit for a new investment property.
Develop your investment portfolio and create more wealth.
You can reap the benefits of rental return and potential capital growth, which can help you pay off existing mortgages or invest in more.
Either way, with well-researched decisions and sound financial backing, investment properties can secure your wealth for the future.
The Potential Risks
If your property value decreases, it can become difficult to build up more equity and you could find yourself in a worse financial position.
In order to avoid this situation, make sure you research your location and trends in the market.
A good location will ensure capital gain over time and in turn more equity.
Not everyone is aware of the costs associated with refinancing.
Switching lenders and refinancing your existing loans can be a rather costly project.
Depending on your loan, you may be required to pay discharge fees, government fees, application fees or establishment fees.
This can very quickly add up to thousands of dollars worth of unexpected costs so educate yourself and have a chat to a professional.
If there is not enough demand for your type of property in the area, then your rental income may be far less than you were originally predicting and this could also alter whether or not you can afford the property in the first place.
You can do your research beforehand by searching the local council’s website for any planned infrastructure developments and consider public amenities to determine whether or not people will rent in the area and how high demand will be.
If it is not a desirable property, renters won’t pay premium rental prices.
Not everyone is going to do right by you especially when you become a landlord.
With any investment property, you run the risk of having difficult tenants in your house who may refuse to pay rent or who vacate the property without sufficient notice.
These situations will leave you with an empty investment property and unfortunately you’ll still need to be paying off the mortgage during these periods.
You should always have some money saved that can cover repayments for these unexpected events.
If you can’t make repayments, you could stand to lose all assets
If you do find yourself in a situation where you simply can’t make your repayments, you stand to lose everything – your investment properties and your principal property of residence (PPOR).
This is of course something you want to avoid at all costs.
Whenever you’re thinking about the next step in your property investing career, always ask yourself if you have the funds to support yourself in a worst-case scenario circumstance.
If the answer is no, you may need to hold off on investing in property and save more to ensure your financial safety.
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