A Guide to Using Home Equity to purchase your first investment property
THE PROCESS OF USING USABLE EQUITY FOR PROPERTY INVESTMENT
Usable equity refers to the portion of your home’s value that you can access for various purposes, including investments. It’s essentially the difference between your property’s market value and the outstanding balance on your mortgage. As property values in New Zealand continue to rise, homeowners find themselves with equity that can be unlocked for property investment.
- Property Valuation
The first step in utilizing your home equity is to get an accurate appraisal of your property’s current market value. This is crucial as it determines the amount of usable equity at your disposal.
- Calculate Usable Equity
You can borrow up to 80% of your home’s value, as per the Loan to Value Ratio (LVR). For instance, if your home is valued at $800,000, your potential borrowing amount is $640,000. However, if you already have a $400,000 personal mortgage, your usable equity, or the amount available for an investment property deposit, is $240,000 This is calculated using the formula (Home Value x 0.8) – Personal Mortgage = Useable Equity.
- Leveraging Equity for Property Investment
Once you have your usable equity, the next step is to assess if you meet the bank’s criteria and can secure approval for a new loan. We would recommend working with a mortgage broker to help you in this process. Once approved, the new loan can then be used as a down payment for an investment property.
- Choosing your property
Choose your investment property wisely. Consider factors such as location, potential for appreciation, and rental demand. A well-researched investment can contribute to both short-term gains and long-term wealth accumulation.
- Managing Risk
While using usable equity can be a powerful wealth-building strategy, it’s essential to be mindful of the risks involved. Fluctuations in the property market and interest rates can impact your investment, so thorough risk assessment is key.
BENEFITS OF USING USABLE EQUITY:
- Diversification of Assets – Investing in a second property allows you to diversify your investment portfolio, reducing reliance on a single asset.
- Potential for Appreciation – Real estate has the potential to appreciate over time, providing a source of long-term wealth growth.
- Rental income- An investment property can generate additional income through rental payments, further contributing to your financial well-being.
Usable equity is a valuable resource for homeowners seeking to take their financial journey to new heights. By unlocking the potential within your home, you can open doors to investment opportunities that have the potential to yield both immediate and long-term returns. However, it’s crucial to approach this strategy with careful planning, research, and consideration of potential risks. When used wisely, usable equity can be a key instrument in building and securing your financial future.