Five financial benefits of using equity to buy property
Since the onset of the global pandemic in March 2020, the property market has boomed.
A far cry from the recession many feared, almost overnight, house prices skyrocketed and property owners found themselves with equity they could never have planned for.
What is equity?
Put simply, the equity in a property is the difference between the value of the home and the amount owing on the mortgage.
If the value of the property has increased over recent months (contact us HERE for a valuation), the equity will have increased along with it, without you doing a thing!
So, what do you do with all that equity?
While you could use the increase in equity to carry out renovations and increase the overall property value, you could also use the windfall to build your asset portfolio and purchase another property.
While investment may not have been on the initial agenda when you first applied for a home loan, here are five financial benefits of using any extra equity to buy another property.
1. Avoid LM
The LVR (Loan Value Ratio) on a mortgage is calculated by dividing the loan amount by the purchase price of a property and multiplying by 100.
The higher the LVR, the higher the considered risk to lenders. If the available deposit is less than 20% of the purchase price, Lender's Mortgage Insurance (LMI) is applied to the loan as security.
By leveraging the equity in an existing property rather than saving a deposit of less than 20%, the LVR will be lower and you will avoid the added financial burden of LMI.
2. Secure a More Competitive Interest Rate
Using the equity to purchase a property means you can use the existing property as security which lenders view as higher quality collateral. This is known as cross-collaterisation and will help lock in a more competitive interest rate and more favourable loan terms.
3. Keep Your Cash in The Bank
Using equity as a property deposit will allow you to increase your asset portfolio while keeping cash in the bank where it's currently earning interest as savings. You can increase your overall wealth without having to change your cash status or re-assess any existing investment payment terms.
4. Help With Negotiations
As a purchaser with equity in an existing property, the vendor may look at your offer more favourably. Knowing that you're not relying on finance or a property chain to complete the sale may mean the vendor will consider a lower offer as it attracts less risk than those who might be able to offer a little bit more but are dependent on finance approval.
5. Increase Cash Flow
As your mortgage repayments will likely stay the same, using equity can increase rental income and improve cash flow each month. As the property market ebbs and flows, you're more secure and with this extra source of income, won't have to sell the property if you ever run into difficulties making repayments in the future.
When using equity to buy property, your investment potential becomes limitless. Contact ManageMe Property Solutions today to find out about valuing your current property and using equity to purchase your next property.