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Release That Equity!

Release That Equity!

30 April 2015 MO'R Mortgage Options

Owning a property can provide a hidden wealth that once tapped into, can be used to help grow your investment property portfolio.

It almost acts like as a second savings stream and may potentially relieve the need to contribute any cash savings towards your next purchase.

We are referring of course, to equity. Equity is the difference between the market value of your home and the current balance of your home loan.  It can be increased when the balance of your home loan is reduced or the value of your property increases (or a mixture of both).

Exactly how much equity you can release on your existing property is determined by -

  1. The current value of your home and other assets
  2. The current balance of your home loan and any other loans secured by that property
  3. Your available income and your existing commitments

SO HOW DOES IT WORK?

You’re looking to purchase an investment property for $480,000 and you estimate you need $20,000 to cover purchasing costs like stamp duty and legal fees.

The lender will let you borrow 80% of this property's market value - $384,000. (It is possible to borrow more with Lenders Mortgage Insurance, but we won’t go into this here).  This means that you need another $116,000 to complete your purchase.

Let's say your existing home is valued at $500,000.  If we keep to the 80% loan to value ratio, this gives us an amount of $400,000 we could potentially borrow from the lender.  But, you still owe $220,000 on your home loan.

So, to calculate the amount of equity that you could release: $400,000 - $220,000 = $180,000

Releasing this equity would give you more than enough to cover the $116,000 required to purchase your new investment property.

Please note, this example does not take into consideration the assessment process or the ability to meet servicing requirements.  

HOW CAN YOU USE THIS STRATEGY TO GROW YOUR PORTFOLIO?

Using the above example, it’s fair to say that saving $116,000 for your next purchase would take some time. By using an equity loan and utilising the wealth you’ve built up in an existing property, you may be able to purchase your next property a lot sooner than expected.

As your property portfolio grows, so does your ability to leverage the equity.  As more of your properties increase in value, you potentially have more sources of equity that can be released.

If you want to make the most of this strategy, it’s important to correctly structure your property loans as it can significantly affect your ability to grow your property portfolio.  This is something we’ll explain further in a later article.

You can find more information on how to build up equity in your home at our website here.

If you would like to fast track your next purchase and release the equity you have available, please contact us at MO’R MORTGAGE OPTIONS.  We can look at your personal situation and let you know whether this strategy can work for you.

MO’R Mortgage Options are a local family owned business under the guidance of Michael O’Reilly.  Michael and his team of professionals have extensive experience in the mortgage industry and provide exceptional service to their clients.  It is for this reason that MO’R Mortgage Options are our trusted and preferred recommendation to our friends and clients.