How Does Equity Work When Buying A Second Home?

You saved for buying your first home while looking at your home equity growth over the years. Now, you are ready to buy a bigger house to better match your growing family’s needs. However, the house prices fluctuate and could outpace your savings and it might become difficult for you to buy another house. You can use your current home equity to buy a second home. Home equity is a part of your home – different from the amount you owe the bank. And, in case the value of your home increases more than your debt, you will have a valuable asset to use in your next move. This blog post will help you learn about accessing your home equity, calculating what you need and using it to purchase a second home.

Understanding Home Equity

Home equity is the difference between the property’s current value and your remaining debt (the outstanding amount that you owe to the bank). When you make monthly home loan repayments, your total home loan amount owed has been minimised, enabling your total equity to rise. In addition to this, if the market value of your property has been maximised, your equity will also be increased.

Using Equity to Buy Property

When you look to buy a second home, especially if it is an investment property, your first concern would be the cash deposit required to secure the property and investment loan. This is where equity comes in to reduce mortgage stress and help you buy another property. Lenders will allow you to borrow against the equity you have in your property. You can use this equity to purchase a second home or investment property. However, you can’t borrow 100% of your equity, but you can borrow up to 80% of your equity.

How is Equity Calculated?

To make the most of your home’s potential, it’s important to have a clear understanding of what equity is and how much of it you currently have in your home. Equity is the portion of your property that you own outright, which is calculated by subtracting the amount you still owe on loans from your current total market value.

Property’s current value – remaining debt= your equity

How Much Equity Do You Need To Purchase A Second Home?

Lenders will allow you to borrow up to 80% of the property’s equity, minus its outstanding debt. To purchase a second property, you need to calculate the loan-to-value ratio to determine how much you can use from your equity.

How to Access Equity?

To access home equity, you need to consider a few things. Follow the steps given below to access equity:

  • Calculate your available equity

Make sure you have enough equity to purchase a second home or investment property and cover extra costs associated with home acquisition.

  • Check how usable equity you have

It will give you a clear idea of how much equity you have and it can help you know your future financial needs and choice.

  • Check home loan options

Finding a home loan that matches your requirements and a lender you can trust is crucial in the process of purchasing a new property. You can also speak to mortgage brokers at Star Homeloans to assess your finances and how you can get the right home loan.

  • Check the cost of accessing and using equity

The product you choose and the amount of equity you want to access may lead to various costs and fees.

  • Loan application and settlement

After deciding on a loan option with your Star Homeloans, we’ll work with you to get the application process done and support you throughout the settlement process.

Conclusion

Now that you know how equity works when buying a second home or investment property along with ways to access your home equity. If you are looking to buy a second home using your home equity, you can get in touch with Star Homeloans as we can help you choose the right home loan product for buying a second home.

Other Useful link:

Personal Loan Broker Sydney

Best Mortgage Broker Sydney

 

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