Property investors using equity to fund purchases

By Bob Wilson, 13th July 2010

Investors are favouring the use of their equity inexisting properties to finance additional acquisitions, a mortgage broker survey has found.

Mortgage Choice says its property investor survey established that 60% of respondents planned to use equity in their home to fund all or part of an investment property by mid-2011.

Equity in a home is best described as the difference between the current market value of your home and the unpaid balance of the mortgage. Equity can be used to fund the deposit for an investment home or, in cases where the borrower owns the home outright, can finance the whole deal.

Mortgage Choice's Kristy Sheppard says national taxation statistics show that one in seven Australians owns an investment property.

"It tends to be an ‘old school' notion that repaying a home loan in full is a must-do before purchasing more properties," Sheppard says. "Homeowners who want to build a property portfolio much more quickly move with less caution and capitalise earlier on the inroads they've already made."

Not that the strategy is without risk - Sheppard warns that borrowers should assess whether they can comfortably afford higher loan repayments and which, if any, lender is willing to lend to them.

Property investors commonly use mortgage brokers to compare finance options and choose a loan product that best suits their circumstances. The three most common types of equity finance are: loan top-ups (increasing the original home loan amount to help fund another purchase); lineof credit (allowing borrowers to withdraw funds in addition to their home loan) and refinancing (borrowers move to a different lender and loan product to increase the amount they're borrowing).

These loan types can sometimes involve higher interest rates than one would pay for an owner-occupier mortgage. Loan top-ups usually involve a lump sum payment with interest payable on the balance of the original loan plus the top-up amount. Line of credit loans generally attract a higher interest rate, often interest-only. Refinancing requires careful comparisons between lenders, looking at all aspects of the loan including fees, interest rates and the method of calculating borrowing capacity.

Sheppard warns borrowers to remember that if the total amount they want to borrow (i.e. the amount the borrower owes on the original mortgage plus the new one) is more than 80% of the total property value, theyc ould be required to pay mortgage insurance.

ENDS