How To Purchase A Property Using Equity

Are you considering adding to your existing property portfolio? If you don’t have the ready cash or savings to purchase an additional property outright, releasing equity in your home could be an option.

For many people who are already property owners, using the equity in their current home as security for borrowing funds to purchase a new property can be an option.

Here we take a look at what equity release is and the steps you can investigate in order to take advantage of the equity in your current property.

Purchasing A Property Using Equity

What Is Equity?

The equity in a property is the amount of money you could expect to realise if you sold the property, minus the amount you currently owe on the property in the form of a mortgage or home loan.

For example, if you could expect your property to sell for $500,000 and the mortgage on the property is $200,000, the amount of equity in your property is $300,000.

Depending on lending criteria, let’s assume up to 80% of the equity in the property can be used as security to be borrowed against for a new property. For example, using the figures given above, if you intend to purchase a new property costing $350,000, in most cases up to $240,000 could be borrowed against the existing equity in your home.

This means you would need to find alternative means of financing the remaining $150,000 needed to complete the property purchase.

How Do I Release the Equity in My Property?

Identify a lender that can provide a suitable mortgage and is prepared to take you on as a borrower.

The property will be valued by a suitably qualified professional and once you know how much your existing property is worth, it’s possible to calculate the amount of equity you’ve got available to use as security against the purchase of a new property.

What Factors, Aside from The Equity in My Home, Will a Lender Take Into Consideration Before Agreeing on A Mortgage?

Although everybody’s circumstances are slightly different, some of the factors that are commonly taken into account when making a lending decision are:

  • The current level of borrowing
  • Credit score
  • Income

How Can I Increase My Equity?

Renovating or extending your existing property can often result in a significantly increased valuation. This will increase the amount of equity in your property to a value that’s usually in excess of the funds spent on the remodeling work.

A real estate professional with a strong sales history in your precinct can provide an opinion of current market value in its unrenovated state, and an expectation of what it might achieve if certain works of a particular standard were undertaken.

Are There Any Risks to Using Equity to Fund a Fresh Property?

It is always recommended you seek professional advice from a financial planner or accountant, and consider your current and future circumstances to determine the serviceability of any loan.