How To Use Equity To Buy Another House
It might be a seaside holiday home, or perhaps your first investment property. Either way, knowing how to use equity to buy another house can be a game changer.
Saving up for your first home deposit is a lifestyle in itself – and not one that most are likely to forget anytime soon. Say goodbye to your Sunday morning smashed avo, weekends out on the town, overseas holidays, and just about every expenditure that doesn’t qualify as “essential.”
If you are looking to purchase your second property, the good news is that there is a way to avoid paying a large deposit – and it’s via the equity you already have in your first.
What Is Equity
Equity is the difference between your home’s value and your loan amount, or the funds that you have already paid back to the bank including your deposit.
All lenders have different terms in regards to how and when you can access your equity, with some offering access to it after as little as six to twelve months. Other factors include:
- The type of property purchased
- The policies of your lender
- Your servicing position with the bank
- Your age and income status
- Your repayment history and credit file status
- Ideally owe under 80% of your existing property value
Let’s look at George’s mortgage and property as an example. George and his family bought their first home in 2014 for $305,000 in Brisbane, and took out a home loan worth $250,000. His wife is expecting their second child, so they’re on the hunt for a bigger space for their growing family.
In 2020, their home has been evaluated to be worth $500,000, even though George still owes $220,000 on his mortgage. With the maximum lending amount of his bank being 80% of the property value, the amazing news is that George’s home equity is $180,000 – which can be partially used to act as a deposit for his second home without having to sell his first.
Pretty cool, right?
Other Things To Consider With Buying A Second Home
Keep A Buffer Fund – It’s important not to financially overcommit yourself, as your second home will still have all of the same bills as the first. These can include electricity, council rates, water, insurance, plus an emergency kitty just in case.
Don’t Forget About Purchase Costs – You may have had access to special exceptions associated with buying your first home, but this may not apply the second time around. Budget for up to 5% on top of your second home for things like stamp duty, legal fees and more.
Beware Of Finance Fees – Refinancing can be costly, but if actioned properly you could get this back via lower interest rates. Loan discharge fees generally range between $100-$400, setup fees $300-$1000, and even a standard valuation fee sits between $200-$500.
Do Your Research – Other than completely refinancing your home loan, there are other ways to access your equity including a line of credit loan, a reverse mortgage, cross-collateralisation, and a redraw facility. Make sure you speak to an independent broker before choosing.
Speak To A Professional
Now that you’re armed with the knowledge on how to use equity to buy another house, it’s important to speak to a finance professional.
Brisbane based mortgage gurus Madd Loans pride themselves on making the finance process fun. An independent operator can be your greatest asset when it comes to navigating loan options, as brokers are there to make you happy – and not the banks.