What is equity in your property?
The equity in an asset, is its value, less any money owed on it.
For example, if your property is valued at $800,000 and the current debt is $300,000, the equity in the property would be $500,000.
How does equity work?
Accessing the equity in your loan is easy. With a simple mortgage refinance, you can be steps closer to buying a second property. The equity from your property can be used as a deposit on a second property, while your current property becomes a security on the new debt. Using equity allows you to buy a second property via a no cash deposit.
Can you use equity to buy a house with no deposit?
Utilising the equity in your current property can allow you to buy that second property with no deposit by using a tactic called leveraging.
Leveraging is where you use the equity generated by the rising value of your existing property to purchase a new one. This strategy depends on the value of your existing property rising while the size of the mortgage either reduces or stays the same.
If you use the equity as a deposit on a second property, you will be paying off two home loans instead of one, so it’s important to ensure your cash flow will be able to handle this. Refinancing your current property to release equity also means you’re increasing the amount of debt on your current home loan, so you will be paying it off for longer and paying more in interest over the life of the loan.
Advantages of using equity to buy another home
Many investors use equity in their existing properties to purchase more investment properties, which enables them to build a bigger investment portfolio. By using existing equity to buy more properties, you can get into the market at today's prices and reap the rewards of price growth than if you had waited and saved the deposit, which can take years.
Using equity to buy an investment property
Equity is one of the most powerful tools property investors have at their disposal because it allows them to build their property empire faster. As mentioned above, lots of investors use the equity in their current property to buy another investment property. That property then grows in value allowing the investor to buy another investment property, and so on.
Over time, if you keep using this approach and adding even more properties to your investment portfolio, it will have a compounding effect: every time the property market rises, your property wealth and useable equity will rise too. On the other hand, if the property market falls, your wealth and useable equity falls too.
This is why diversification is so important. At Bolt & Hunter, we work with our clients to ensure their property portfolio is initiated with a vigorous diversification strategy in mind. Rather than putting all your eggs in one basket, we consider micro and macro environmental factors to devise a strong game plan so that your bases are covered. Buying in various locations, markets and contrasting product options are some of the ways we navigate the market to safeguard against the uncontrollables.