Do you need to use your home equity to buy a rental?

When your home has gained value and you are reducing your debt every month, you can quickly find yourself with a lot of equity in your home.

It may be possible to access some of this equity to invest (keeping in mind that repaying your mortgage is the safest and least risky investment you can make).

The average Kiwi real estate investor starts using the equity in his house to buy his first rental property. Could it work for you? Before you start browsing the properties online, you need to ask yourself some important questions, says Tracy Creswell, one of Westpac’s most experienced mobile mortgage managers.

What is my long-term financial plan? Investing in the property is not an objective in itself. It’s a way to help you reach your money goals, and it may not be the best way for you.

Talk to an authorized financial advisor and suggest long-term financial goals, then think about how to achieve them. If the property suits your plan, using your equity to buy a rental could be the right choice for you.

What is your appetite for risk? Creswell says she has sometimes seen inexperienced investors buy their first rental, spend sleepless nights worrying about their tenants and their property, and then bailing out three years later, panicked, without earning a buck.

If you are not inclined to take risks, an installation in an inexpensive area may not be your best choice. Instead, you may prefer to pay more for a new build and employ a property manager. Or you may prefer to avoid all the stress and just repay your own mortgage.

Do you know how to structure your properties? Talk to your accountant before buying a rental. Good advice on structuring your loans and accounts can save you a lot of money and help you repay your mortgage faster.

Have you been realistic in your calculations? Using our calculator, you can determine the return and cash flows of a rental property. “Be realistic,” warns Creswell: “The bank is doing calculations by assuming vacancies and interest rate hikes. You will also be assessed to make sure you can pay the principal and interest, not just the interest.

“We need to be responsible for this, we make sure you have a safety margin so you can keep your investment.”

Are you ready to use your home as security? Say you have a million dollar house with a $ 700,000 loan. Provided your income supports the larger loan, you can borrow up to 80% of the value of your home, up to $ 800,000.

This means that you can potentially borrow an additional $ 100,000 from your home as a deposit in an investment property.

Investment properties currently require a down payment of 30%. With $ 100,000, you could therefore spend up to $ 333,000 on renting (again, assuming you and the property meet the loan criteria).

The loan would be secured on both the rental property and your home. “So, if something goes wrong and you do not repay the loan on your rental, the bank has the right to rent, but also to your home,” says Creswell.

“You have to be able to accept the risks, think long-term and have a plan. This is not a quick enrichment ploy, but ownership can be a great way to secure your financial future. “

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