Maximizing equity to build your property portfolio
March 22nd, 2013 • No comments
Equity is the difference between what your property is worth and what you owe. As a property’s value grows, the equity in the asset increases providing a source of funds to borrow against. ‘Unlocking’ this value provides a significant opportunity for investors to buy more property quickly without needing to save for a deposit.
Investors will need to find 20% from the equity in their existing property as a deposit if they want to avoid paying Lenders Mortgage Insurance (LMI). Maximising the equity in the property will increase your borrowing capacity and could even generate enough for you to invest in more than one property.
Firstly, investors should ensure that the property achieves the highest valuation possible. This means keeping it well maintained and making some aesthetic improvements if necessary. Agents will often provide free valuations to give you an idea of the market price and can also offer advice on how to improve a property and which areas you should focus on. However, lenders will do their own valuations and in the current risk-averse environment, investors should be prepared for these to come in under what they believe the market value to be.
Secondly, shop around for a lender. Each lender has different assessment criteria and your approved amount could differ by ten of thousands of dollars between lenders. Be aware though that each application is recorded on your credit record and this could lead to rejection from your chosen lender if they see you have made multiple applications.
A good way to avoid this issue is to seek help from an experienced mortgage broker. They will know which lenders are likely to be more flexible with their borrowing capacities and can offer a variety of products from different lenders, at no cost to you.
As you grow your portfolio, diversify your lenders. Utilizing different lenders for different properties will give you greater flexibility of products, reduce risk and will provide more opportunity to further build your portfolio. It can be tempting to stay with the one lender for simplicity or you may be looking to co-secure the loan rather than taking out a separate one. While this strategy does have its benefits – potential costs savings and the advantage of not having to pay LMI if your deposit is less than 20% – there will ultimately be a limit as to what a single lender can offer.
If you really want to make your equity stretch further, you could choose to put down a deposit of less than 20%, take on the LMI, and invest in two properties. As LMI is a borrowing cost it is tax deductible over five years for investments. Many investors use this strategy to buy more than one property using their available equity.
In addition to the value of the property you are borrowing against and the equity it has created, the amount you will be able to borrow will also depend on a number of other factors such as the value of the new property, the rental income it will produce, other assets, income and your credit risk. It is important that the impact of these factors on your approval is carefully considered before you submit your application.
As always, professional financial advice is recommended to ensure you make the decisions best suited to your financial position. We recommend using a local area expert when considering finance – http://www.crawfordinternational.com.au/professional-services/
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