Unlock Your Equity, Unlock Your Wealth

Posted by Oliver Hickman on 17/08/18
Unlock Your Equity Unlock Your Wealth

Got equity in your family home? This could be the key to building wealth through property investment.

Your family home can seed your investment portfolioOne of the biggest factors holding people back from property investment is how hard it is to put together a deposit. The banks have different rules for investment lending than they do for owner-occupied homes. You can find lending for an owner-occupied property with a 5-20% deposit, but for an investment property, the banks require a deposit of up to 35% of the price.

With house prices the way they are at the moment, that’s a lot of money to save. But if you’ve been paying down the mortgage in your home for awhile, and/or you live in a high-growth area, you might not need to save anything at all.Your home equity: explained home equity is the difference between what you owe on your mortgage and what your home is worth (its market value). It’s easy to work out – if your home is worth $500,000 and you have $150,000 left to pay on your mortgage, then you have $350,000 in equity in your home.

You will probably discover your equity increases over time as:

  • You pay off the principal on your home loan, reducing the amount you owe the bank.
  • You make renovations and other improvements to your property that improve its market value.
  • The market improves in your area and homes rise in value.

You can use this equity to take out a loan to buy an investment property.

Remember that the Reserve Bank of New Zealand’s loan-to-value ratio may still apply to your family home after using your equity, so you may need to ensure you still have 20% equity remaining in your primary home.

That’s why at Opes, we used this simple calculation to help you figure out if you have enough equity. This equation takes into account the LVR restrictions.

Current House Value x 0.8 – Current mortgage/debt = usable equity. (Learn more about our Leverage Calculator here.)

If the amount of useable equity covers the deposit on your rental property, you may be able to move ahead with your investment subject to the bank lending you the money.

A top notch mortgage broker who specialises in property investment will be able to work with the bank to loosen these constraints. That’s why we recommend a mortgage broker as part of your A-team.

As well as your primary home, you can also use the equity built in your investment property as a stepping stone to buying another property, and expand your portfolio faster.

If you want to find out more about using your home’s equity to build wealth for the future, come along to one of our free investment seminars, or contact the Opes Partners team today.