Property markets have had a wild ride over the three years since Covid first arrived.
There was significant value growth for homes across Australia, followed by a correction phase which coincided with a super aggressive, and still continuing, rate hike cycle by the RBA.
For many homeowners, the correction phase only put a small dent in the equity their home had accumulated and now, with the correction phase appearing to be over and values recovering, many have the opportunity to use the equity in their permanent place of residence (PPOR) to buy investment properties and create future family wealth.
Time to refinance
If you live in a home you already have had a mortgage on for some time, you’re in luck! With the past few years having significant growth, you will undoubtedly have some equity built up and it’s time to unlock and release it.
What is Equity?
Equity is the portion of the home that you own outright. If you originally borrowed 200k on a 300k house, your equity is 100k. Now, let’s say that the property rose in value by $50k over the next year and you have now also paid another $10k off it due to paying the principal component of the loan, then you have a further $60k equity. So now the total equity = $160k and the total Loan = $190k on a property worth now $350k. This is now where the investment magic happens.
You see most lenders will lend up to 80% of a property’s valuation without the cost of Lender Mortgage Insurance (LMI). Therefore, in this case, you can potentially borrow $280k (80% of $350k). With a potential amount of $280,000 less $190,000 current loan balance, the equity you can harvest is $90,000, which is enough for a deposit, stamp duty and other purchase costs for investment properties in many markets around Australia.
Don’t go it alone
Using your Principal place of residence (PPOR) to invest can be complicated if you’re not a seasoned investor.
Where will you get a home loan from? The number of lenders specializing in various areas has significantly increased, and there is a possibility of their lending criteria changing on a monthly basis. Think of a maze that constantly changes. The lender that is best for you (and maybe the only one that will lend to you) could be one you never knew existed. For these reasons, it’s essential to engage professional help.
Mortgage brokers are the obvious choice because they can educate you on what loans might be suitable for you and hold your hand through the tedious financial admin side of things (and even better, you don’t have to pay them). They earn their commission from whichever lender you end up going with. Brokers can also help by discussing your situation and helping you identify a goal and create a strategy to get there. They know all about common mistakes or hurdles that borrowers experience and how to avoid them.
Just make sure you choose your broker wisely. Ask them how many lenders are on their books and how many other clients they have helped create an investment portfolio using the equity of their current home. If a broker wants to cross-securitize your two properties into one loan, RUN! Sometimes a broker might seem to get you a good deal, only for you to realise later that you can’t pull more equity out when it suits you because your properties are locked together in one loan. Also, you need to make sure your broker doesn’t lock you into a non-refinance term.
Zinger Finance is a brokerage that was established with investors in mind. It boasts a group of financial strategists that can help you structure your loans with future investments in mind. Each day, Zinger Finance brokers deal in the most mind-bending and complicated loan deals for investors with 5/10/20+ properties purchased through companies, trusts and SMSFs. A simple release of equity from a PPOR for an investment property is a walk in the park for them.
An interesting strategy
You already have your investment strategy, now it’s time to look into your loan strategy. Most investors start out with an interest-only loan. Paying interest only maximises your cash flow and maximises tax benefits. Most banks will let you pay interest only for the first 1-5 years of the loan. After that, you’ll need to either refinance with another bank or begin paying down the principal amount.
If you are wondering how we can help you achieve this, contact us at B.Invested and speak to our Investor Relations team.