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How Does Equity Work When Buying a Second Home?

How Does Equity Work When Buying a Second Home?

Maybe you want to buy a holiday home, or an investment property to rent it. Or maybe you want to purchase a home where you would like to live.Using equity to buy a house without a cash deposit would be the best choice you can make to buy a second home. In today’s blog, we’ll discuss how you can use equity to buy another home. Let’s get started

What is Home Equity?

Your home equity is the difference between the value of your property and the balance of your home loan. If you have bought a home for a few years, there would be a high chance you’ve some reasonable equity in your property.

How to Use Equity to Buy Another Property?

When you look to borrow money from lenders or other financial institutions, they will consider various factors. In relation to the property, they will look at LVR (loan to value ratio), or in other words, the percentage of the value of your property you want to borrow. Follow the steps given below to know how to use equity to buy another house:

  • Calculate available equity

To start the process of buying a second property, you must first determine your available equity. The estimated market value of your first property is used to determine the amount of available equity. This amount is frequently determined by comparing your property to others that are for sale in the neighbourhood or by a real estate agent’s valuation. Once this sum is established, it will be subtracted from the remaining amount on your existing loans for your first property.

  • Calculate accessible equity

When using equity to buy investment property , you must validate your accessible equity after determining your available equity. If the lender believes it will be difficult for you to repay additional loans, they may limit the amount of equity you are able to access. Lenders typically make this determination after considering your expenses, work, debts, and source of income.

  • Check different loan options

After checking how much you can access equity, you need to go through different loan options available in the market. This is the best opportunity for you to assess your loan structure, current interest rate, fees and features against other banks or lenders. Home loan brokers can help you with this process to help you choose the best loan product. After finding your best deal, you are required to determine your financial position to ensure your loan application approval.

  • Determine costs for accessing equity

There might be a case when lenders will charge an additional fee when you refinance your home loan to access your home equity. This is true, especially when you decide to switch lenders. In addition to this, if you access over 80% of your home’s worth, you might be facing additional costs with home loan insurance

  • Loan Application

After seeking help from a reliable home loan broker and considering all loan options, you can move further with a loan application. You need to provide various documents to get a loan.

  • Settlement

You can expect a settlement on your loan after the exchange of contracts within six weeks. However, various aspects could affect the approval and settlement timing.

Buying a Second House and Renting the First in Australia

Are you thinking to buy a second home while renting out the first home in Australia? Buying a second home offers the opportunity to build wealth. Now, the question arises, do you need a deposit for your second home? Well, you don’t need a deposit when buying a second home because you can use home equity as you may have built enough equity if you have purchased your first home for a few years. Moreover, make sure to seek help from a professional broker who can help you with the right choice.

Conclusion

Now, you have an idea of how does equity work when buying a second home. If you want to know how you can use your available home equity to buy your second home in Australia. For more information, you can contact Home Star Home Loans.

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