You could be sitting on an equity goldmine without even realising. Here's how to use your home to get an investment property — without cross-collateralising.
Most people don’t tend to invest in flat property markets because they’re deterred by the apparent negative sentiment, sensationalist media headlines or uneducated opinions from family and friends. But in reality, now is the time to make that investment in theproperty market – before the upswing begins, as you now have the greatest potential for growth. And with fewer buyers in competition with you, more choice in properties, and thus greater negotiating power, now really is the time to get onto the property investment ladder.
Utilising the equity in your principal place of residence (i.e. your home) is one of the easiest and quickest ways to buy an investment property. Are you thinking of refinancing your mortgage to buy an investment property? If so, here are six tips you need to know before taking the plunge.
1. Engage a mortgage broker rather than a bank direct
A bank will only offer you their home loan products whereas a mortgage broker will be able to offer you different loans from a range of lenders. Furthermore, not every bank will lend you the same amount of money, which could severely restrict the type of investment property you can acquire. By engaging a broker, you’ll be able to find the best loan product and deal that’s suited to your circumstances.
2. Ensure your mortgage broker specialises in investment loans
Don’t engage a broker that usually offers home loans or is ‘all things to all people’ and provides loans for cars, boats or personal loans. It’s best to utilise a broker who specialises in property investment loans because they’ll have the best understanding of ways to adequately structure your finances to minimise tax and maximise your cash flow. They’ll be able to give you more knowledgeable property investment financial advice, rather than general investment advice that might not translate well to the property market.
3. Determine how much your property is worth and make a budget
Your broker will be able to organise a valuation of your home, which will help to determine your borrowing capacity. You should also make a household budget to determine your discretionary income (i.e. money left over after weekly expenses, such as bills) and how much income you’re comfortable to allocate to the holding costs of the investment property (i.e. how much money it will cost you to hold the investment property each week).
4. Define your price range
Now that you’ve determined your borrowing capacity and allocated money from your household budget towards the potential holding costs, you’ll have a good idea of the price range that you can afford when buying your investment property, as well as the rental return required to service the loan. Make sure you speak to a buyer’s agent who specialises in investment property because they’ll be able to find the best type of property that suits your circumstances.
5. Obtain pre-approval but don’t cross-collateralise
Before making an offer on a property, make sure you have pre-approval for your loan. This will put you in a stronger position over other buyers when you do want to place an offer, and sellers will take you more seriously. Ensure you don’t cross-collateralise your loans for your investment property and your principal place of residence (i.e. don’t use more than one property as security for any single loan).
6. Opt for an interest-only loan
Make the loan on your investment property as an interest-only loan, that is, you only pay the interest and not the principal. This will help improve your cash flow and you’ll be able to direct any additional cash towards paying off your home loan, which is non-deductible debt, meaning you’ll be minimising your tax bill.
Refinancing the mortgage on your home to purchase an investment property is a simple way to kick-start your property investment journey.
These six tips will help you to approach the process in the right manner. However ensure you engage trusted advisers who will be able to provide you with the right advice because your loans and financial structures can make a significant difference as to how much wealth you generate through property investment.