If you own a home in Everton Park and have been making regular repayments, you may have built up equity that could potentially be used towards purchasing another property.
Equity is the difference between what your home is worth and what you still owe on it. When enough equity is available, you may be able to borrow against your existing property to help fund the deposit and purchase costs for another property. This can reduce the amount of cash you need to save separately, although the amount you can access will depend on your property valuation, borrowing capacity and the lender's requirements.
What Counts as Usable Equity
Usable equity is the portion of your property's value that a lender may allow you to access while maintaining an acceptable loan-to-value ratio. As a general guide, many lenders will allow borrowing up to 80% of your home's current value without requiring lenders mortgage insurance, subject to their lending criteria.
Consider a homeowner in Everton Park whose property is now valued at $750,000 and who owes $420,000 on their mortgage. At an 80% LVR, the maximum lending secured against the property would be $600,000. After deducting the existing $420,000 loan balance, this leaves approximately $180,000 in usable equity. That amount could potentially be used towards the deposit and purchase costs on another property, subject to borrowing capacity and lender approval.
How Lenders Assess Your Borrowing Capacity
Your borrowing capacity determines how much additional debt you may be able to take on. Lenders assess factors including your income, existing debts, credit limits, living expenses and proposed loan repayments. If you're purchasing an investment property, lenders will generally include a portion of the expected rental income when assessing borrowing capacity rather than using the full rental amount, with the percentage recognised varying between lenders.
Lenders also assess borrowing capacity using an interest rate higher than the actual loan rate to allow for potential increases in repayments. This means the amount of equity available in your property may be higher than the amount you can ultimately borrow.
The equity calculation tells you how much of your property's value may be available to access. The borrowing capacity calculation determines whether you can service the total debt. Both need to work together before a lender will approve the additional borrowing.
Structuring the Loan for a Second Property
When you're using equity to fund another property purchase, the way the lending is structured can be important. A common approach is to create a separate loan split against your existing property for the deposit and purchase costs, with a separate loan secured against the property being purchased.
Keeping the equity release separate from your existing home loan can make it easier to track how the borrowed funds have been used, particularly where the funds are being used for an investment property. It can also provide greater flexibility if you want to refinance or sell one of the properties in the future.
Another option is cross-collateralisation, where both properties are used as security for the lending. While this may suit some circumstances, it can reduce flexibility because the lender has security over both properties. The most appropriate structure will depend on your circumstances, objectives and future plans.
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The Difference Between Buying an Investment Property and a Second Home
If you're buying an investment property, lenders will generally assess the application differently from a second home you intend to live in. For an investment property, lenders may include a portion of the expected rental income when assessing borrowing capacity. A second owner-occupied property may not generate rental income, so the lender will generally assess the additional repayments against your household income and existing commitments.
Where borrowed funds are used for an income-producing investment property, the interest and certain other expenses may be tax deductible depending on how the funds are used and your individual circumstances. You should obtain independent tax advice regarding the deductibility of interest and other property-related expenses.
Whether an investment property or a second owner-occupied property is suitable will depend on your income, existing debts, living expenses, borrowing capacity and longer-term objectives. A broker can help you understand the lending implications of each option before you start looking at properties.
How Much Equity Do You Need
The amount of equity you need depends on the price of the property you're buying, the deposit required by the lender and the associated purchase costs. These costs can include transfer duty, conveyancing or legal fees, lender fees and other expenses associated with the purchase.
For example, if you have access to $180,000 in usable equity, this could potentially contribute towards a 20% deposit and purchase costs on a property in the mid-$700,000s. The exact amount required will depend on the purchase price, the location and type of property, applicable transfer duty and the lender's requirements.
If your usable equity is lower, you may still be able to proceed with a smaller deposit. However, borrowing above certain loan-to-value ratios may result in lenders mortgage insurance or other lender requirements. Running the numbers with a broker before you start looking at properties can help establish a realistic purchase price range.
What Happens to Your Repayments
When you access equity and take on additional borrowing, your total loan repayments will increase. The amount will depend on how much you borrow, the interest rate, the loan term and whether the new property generates rental income.
If you're buying an investment property, rental income may help offset some of the additional repayment burden. Interest on funds borrowed for an income-producing purpose may also be tax deductible depending on how the funds are used and your individual circumstances, so independent tax advice should be obtained.
Your lender will assess whether you can manage the combined repayments on both properties based on your income, expenses and existing commitments. If rental income forms part of the application, lenders will generally use only a portion of the expected rental income when assessing borrowing capacity, with the amount recognised varying between lenders. Understanding this before you apply can help you adjust your budget or property target if the numbers do not align.
Using Equity in Everton Park's Current Market
The process will generally start with a valuation of your existing property to establish how much usable equity may be available. Your broker can then assess your income, expenses, existing debts and proposed purchase to determine your borrowing capacity and the amount of additional lending that may be available.
Once your position is clear, you may be able to apply for pre-approval to get a clearer indication of your potential borrowing limit before making an offer. Pre-approval can also provide greater confidence when negotiating and demonstrate that you've already undergone a preliminary lending assessment. However, pre-approval remains subject to lender conditions, including assessment of the property being purchased and any changes to your financial circumstances.
Formal approval will generally follow once you've signed a contract and the lender has assessed the property and any outstanding application conditions. Once formal approval has been obtained and the loan documents and other settlement requirements have been completed, settlement occurs on the date agreed under the purchase contract.
The Application Process When Using Equity
The process starts with a valuation of your current property to confirm how much equity is available. Your broker will then assess your income, expenses, and the property you're planning to buy to determine your total borrowing capacity. Once that's clear, you can apply for pre-approval so you know exactly what you can afford before making an offer.
Pre-approval also gives you confidence when negotiating, as sellers and agents know you have finance in place. The formal approval process follows once you've signed a contract, and settlement typically occurs within 30 to 60 days depending on the terms of your purchase.
When Equity Alone Isn't Enough
There are situations where you may have substantial equity available but your borrowing capacity does not support taking on additional debt. This can happen if your income has not increased, your expenses or other debts have grown, or lending assessment requirements have changed since you took out your original loan.
Lenders generally assess borrowing capacity using an assessment rate that is higher than the actual interest rate you'll pay. This means that even if you're comfortably managing your existing repayments, your assessed borrowing capacity may not support the additional lending you're seeking.
In those circumstances, reducing existing debts, paying down your home loan, increasing your income or adjusting your property budget may help improve your position. A broker can model different scenarios and explain what may need to change before another property purchase becomes achievable.
Ready to Use Your Equity to Buy Another Property?
Whether you're looking to purchase an investment property or a second home, Wealthcove can review your available equity, assess your borrowing capacity and compare lenders, loan structures and lending options based on your circumstances. Book an appointment with Liam Pahl, Finance & Mortgage Broker at Wealthcove or call Liam directly on 0452 646 192 to discuss your options.
