How to grow your property portfolio using home equity.
Image: Claudia Lambert Interiors | , Woollahra
Are you hoping to expand your property portfolio but uncertain about how to finance your next investment and what's involved? Look no further than your own home. Yes, you read it right – your current property might be the key to kickstarting your journey towards building a property portfolio.
Leveraging equity can also open doors to various financial opportunities, such as borrowing against your equity to invest in additional properties, renovate, or achieve other financial goals. This blog will explore the ins and outs of buying an investment property with a home equity loan, informing you on how to build a property portfolio.
What is home equity?
Let's first grasp the concept before diving into the nitty-gritty of leveraging home equity. Home equity essentially represents the difference between the current value of your home and the amount you still owe on your mortgage.
If you've been paying off your home loan for several years, chances are you've built up equity in your property. In a booming housing market, your equity could have significantly increased, presenting you with new financial opportunities.
How home equity works and how it’s calculated.
Home equity works by allowing you (the homeowner) to borrow money against the value of your home. You can access this equity through a home equity loan, using your home as collateral.
The calculation is straightforward: subtract your outstanding mortgage balance from your property's current market value. For example, if your home is valued at $500,000 and your outstanding mortgage debt is $320,000, your equity amounts to $180,000.
By tapping into the equity built in your existing home, you can potentially refinance your mortgage and release additional funds to invest in your next property.
Considerations before diving in.
Before leveraging your home equity for an additional property, it's important to weigh the risks and rewards carefully. Consider factors such as interest rates, repayment obligations, market conditions, and your financial situation. Additionally, ensure a comprehensive investment strategy to maximise returns and mitigate potential risks.
As a homeowner, if your property has appreciated since the time of purchase, the increased market value contributes to the growth of your home equity. Fluctuations in the real estate market can also impact your equity position, so staying up to date on your property's value is essential.
Why a property valuation report is essential.
Before you can leverage off your home's equity, a property valuation report or appraisal is essential to ascertaining your home's current market value. This report is a crucial reference point for determining how much equity you have, which will determine your refinancing position and your investment capabilities.
What deposit is required for your next property?
Leveraging home equity reduces the need for a substantial deposit on your next property. Using your existing equity as a down payment can potentially secure favourable financing terms and expedite the purchase process.
Refinancing means changing your current mortgage, often to get better terms and tap into your home equity for investing in another property and expanding your portfolio.
How long does it take to build equity?
Patience is key when buying an investment property with equity. The timeline varies based on factors such as your mortgage repayment schedule, property appreciation rates, additional contributions towards paying off the mortgage and obtaining an accurate property valuation to assess your home’s market value.
Conclusion.
Leveraging your home's equity can be a powerful tool for expanding your property portfolio. When navigating the realm of home equity, consulting with your home mortgage provider is crucial. Your mortgage provider can offer invaluable insights into your equity position, financing options, and potential risks of leveraging home equity for investment property purposes.
We hope that by understanding the nuances of equity and consulting with financial experts, you have gained better insight on how to build a property portfolio. A home equity loan could unlock the door to your investment property opportunities. So, if you've been eyeing your next investment property opportunity, remember—your home might hold the key to realising your property investment dreams.