Property investing is a popular strategy to create wealth. In the current market, this could be a great wealth creating strategy. Depending on how much of the mortgage has been paid off and the capital growth of the property, most households are sitting on untapped wealth by way of equity. Accessing this equity for property investing is a feasible proposition. A qualified mortgage professional will be able to aid in working out the financial affordability of the project.
When purchasing an investment property by using equity in the home, the owners will have to meet the lending criteria of the banks. These are:
The level of property investing equity available – the difference between the value of the property and the current home loan.
The capacity to service the two loans. This is calculated by taking into account the household income, including the anticipated rental from the investment property, less all household liabilities. The different ways of accessing the equity is dependent on the circumstances and the future investment strategies of the borrowers.
Cross-collateralized property investing
This simply means using the available equity in the home as a deposit for the purchase of the investment property. The home loan remains the same and a new loan set up for the investment property.
Equity Release as a Lump Sum
The home mortgage is increased by the amount required to fund the purchase of the investment. This enables the two properties to be independent of each other and can even be with different lenders.
Line of Credit Equity Release
A line of credit facility with an upper limit can be set up to be used as and when required by the borrower. This may be for the purchase of one investment property or more. This method gives the borrower flexibility in handling their property investment strategy.
It is important to remember that property investing carries a certain amount of risk. Therefore, before taking any irrevocable steps it is necessary to establish the affordability of the higher repayments. Getting professional advice from financial planners, tax accountants and mortgage brokers can help minimise the risk and exposure and aid in the wealth creation strategy.