Typically, when you buy a property, you would want to contribute 20% deposit, and pay for the 4%-ish stamp duty, with your own savings.

On a $500k property, this can equate to around $120k.

Let’s say you and your partner save $20k a year… it can take you 6 years to get there. By that time, the price for the same property has probably doubled, and you will need $240k instead of $120k…

Surely, there has to be a better way?

If you have an existing property, which has itself doubled in value since you purchased it… chances are you’re sitting on a lot of equity in that property. Equity is the difference between the market value of your property, and the mortgage balance.

Not all equity can be utilised by the bank. To get the most competitive home/investment property loan, you would want the total loan balance to be no more than 80% of the property value.

So, if you purchased the property for $500k a long time ago, borrowed $400k at that time, and your loan balance today is still $400k… the figures will look like this:

  • Property value: $1m (congratulations)
  • Equity: $1m – $400k current loan = $600k
  • Usable equity: 80% of $1m, minus $400k current loan = $800k max loan – $400k current loan = $400k additional loan
  • Note, the usable equity is less than 80% of the equity

It is possible to borrow a total of 88%-95% of the property value, if you are willing to pay Lenders Mortgage Insurance (LMI). This is a one-off cost which is typically around 2%-3% of the loan balance, or 2%-3% of the property value (as the loan balance will be pretty much equal to the property value at this point).

So, by accessing your usable equity, you can buy another property now, instead of waiting… 6-12 years?

Equity is different from savings, in the sense that it is accessed in the form of a loan. The equity you access will form part of your maximum borrowing power. So if your income (including the expected rental income from the property being purchased, or the property you’re moving out of) is only good enough to borrow $1m… if you’re needing to access $400k worth of equity, your available loan after this will be $600k.

Would you like us to work out your approximate borrowing power? We can do that for you for free 🙂