In the Australian Real Estate market where property price often rises, equity can be one of the most powerful tools for property owners. Equity refers to the difference between the property’s market value and the remaining balance on your mortgage. Let’s say your property’s value has grown over time and you have paid a certain amount of loan, then you can leverage the equity to buy other property.
How Does It Work?
Knowing how much usable equity you have is the first step for the property owners. Usually, lenders in Australia allow you to borrow up to 80% of your property’s current market value, minus the remaining mortgage. For example, if your property is worth $800,000 and you owe $400,000, your total equity is $400,000. However, your usable equity would be 80% of $800,000 ($640,000) minus $400,000, where the usable equity would be $240,000.
Now, this usable equity can be the deposit for your next property. With this, you don’t have to worry about significant savings and can grab the best deals in the market. After determining your usable equity, the lender evaluates your borrowing capacity based on your income, expenses and credit score.
Benefits of Using Equity
Leveraging the equity in your home to purchase another property can be a strategic move for the real estate investor or homeowner. Here are some benefits of using equity:
No Requirement for Cash Savings: To enter into the real estate market you need to be financially ready. Using equity allows you to sooner enter the property market without having to use your savings for deposit.
Wealth Building: While you are investing in properties with growing areas, you also diversify your portfolio. This can create long-term wealth through rental & capital appreciation. Hence, investing in multiple properties helps to minimise the potential risks in the market.
Tax Advantages: In some cases, you might be eligible for tax deductions on interest payments, property taxes, mortgages and other expenses related to your investment property.
Also with the appreciation of the property, one can enjoy capital gains tax exemptions at the time of selling the property.
Using equity to buy another property can accelerate your investment objectives. However, to ensure everything aligns with your financial situation, careful planning and expert guidance are required.
Consult with a financial advisor or mortgage broker to flourish in your investment journey.
