Well, buying a property for nothing is not entirely true. However, did you know that you can use equity in a property to finance the purchase of an investment property?
Depending on how much equity you have in your home, you can refinance to access this equity to cover the cost of your deposit and other fees of purchasing a property and pay nothing, or, more accurately, you don’t need the cash in the bank.
Equity is the difference between your property value and the amount you have owing on your home loan.
To qualify for an equity home loan:
- You can generally release up to 80-90% of your property value in equity to buy a second property.
- You must owe less than 80% of the property value on your home loan.
- Your mortgage repayment history must be perfect.
- You will need to provide your last two payslips.
- You will need to provide your most recent group certificate.
- There are also low doc options are available for self-employed borrowers who cannot prove their income through traditional means.
- Your credit file should be clear of black marks.
In some instances, you can borrow up to 105% of the property value.
While equity borrowing can be practical and convenient, you need to be mindful and weigh the pros and cons of this borrowing carefully, as there are risks if you fail to make loan payments. Risks of home equity loans can result in extra fees and a lowered credit score.
The main risks of a home equity loan are:
- Interest rates can rise on some loans.
- Your home is held as collateral and linked to the investment property.
- Equity can rise and fall.
- Paying the minimum could make payments unmanageable down the line.
A home equity loan could be a good idea if you use the funds to improve your home, invest in additional properties, or consolidate debt with a lower interest rate. However, a home equity loan is a bad idea if it will overburden your finances or if it only serves to shift debt around.