Dreaming about that investment property or holiday home? With property values higher than ever, many homeowners are looking to take advantage of the increased value of their home to buy a second home or investment property.
Before you start scrolling through property listings, there are a few things to be aware of when it comes to using your existing equity for a second home. Here’s what you need to know.
Equity vs. usable equity
You may have equity built up if your home has increased in value or you’ve paid down part of your home loan (or both!). This means there’s a bigger difference between the value of your home, and the amount you still owe on it. Depending on your circumstances, you may be able to borrow against this extra amount to consolidate debts, make a big purchase like home renovations or a car, or put down a deposit on a second home.
There is a difference between total equity and usable equity. Just because you have $300,000 in equity, it doesn’t mean you’ll be able to take out the full amount. Your lender will need to work out how much you can afford to repay and this will determine how much of your equity you’re able to use.
To unlock your equity to use for another property, you’ll need to apply for a home loan increase or top-up. Here are a few questions to ask yourself before you do.
How much more can you afford to borrow?
Taking out more on your home loan means increased repayments, and your lender has a responsibility to make sure you can meet those extra repayments without going into financial hardship.
Before you apply for a loan increase, be ready with up to date documentation to verify your income and any debts or other significant expenses that could affect your ability to make higher home loan repayments. This is especially important if your circumstances have changed.
How much equity you can draw down will depend on a number of other factors, including:
- How recently your loan settled – for example, if you have a Bluestone loan, you may be eligible to draw down more as long as it has been at least six months since settlement. If it’s been less than six months, you will need to wait, but you can always do your budgeting, look at properties and get your documentation together in the meantime.
- Previous payment history – if you’ve been in arrears or had difficulty making your repayments, your lender may be concerned about how you’ll meet larger repayments if you take out more. Policies vary between lenders – at Bluestone you will need to have six months or more of clear repayments to take out more on your home loan.
- Any changes in your circumstances – if you’ve recently changed jobs, or moved from a full time job to self-employment, this might affect how much you can draw down.
- Your loan to value ratio (LVR) – this is the percentage of your property’s value that you can borrow against. In most cases this is 80%, but sometimes you can borrow more. When you apply for an increase on your loan, you’ll need a new valuation to determine your new LVR. How much you can borrow will depend on the LVR limits of your specific loan and how much you can comfortably repay.
- Any recent credit issues – when you apply for a loan increase, a credit check will be performed, the same as it would if you were taking out a new loan.
What documents do you need if buying a second home?
If you’re planning to use your equity to put down a deposit on a second home, we’ll need to see the same documentation as when you first applied for your loan (except verification of your identity). This is so we can check that you can make the higher repayments. We’ll also need some extra information, including the contract of sale and an estimate of rental income if applicable.
How do I get started?
Please complete our loan increase request form or call us on 13 25 83 to learn more about buying a second home or investment property with your existing equity.
