Using Equity for Investments

Dan and Jessica bought their four bedroom family home in Rockhampton in 2003 for $247,000 putting down a $49,400 deposit and taking out a loan for $197,600.

The couple recently decided that they’d look at breaking into the investment market so they contacted their mortgage broker to discuss finance.

Their broker suggested that they get a valuation of their home, and they discovered that it was now estimated at $480,000.

Over the years Dan and Jessica had paid $48,000 off their original loan leaving $149,600 owing on the property.

Today’s valuation of the property, less the outstanding loan, left them with $330,400 worth of equity.

Their broker suggested that they consider refinancing their own home to the loan ratio of 50 per cent to free up some equity for an investment. Based on the current property value and assuming they could afford the repayments, they would be able to borrow $240,000 – making an additional $90,400 available for investment purposes.

This strategy appealed to Dan and Jessica because otherwise they would have needed to liquidate their managed funds to raise the deposit for the investment property and this was not a viable option as these fund balances were low due to recent poor performance.

They decided to put down a 20 per cent deposit on a $350,000 two bedroom apartment and take out an 80 per cent loan.

The deposit came to $70,000 leaving a further $20,400 to cover stamp duty and other expenses while a $280,000 loan covered the rest of the purchase price.

Now that Dan and Jessica had a bigger loan on their home their repayments had gone up, but they were pleased to discover that the repayment on their investment property was almost covered by the $385 weekly rental the investment property was generating.

And because the couple managed their investment themselves they reduced the overheads against the gross rent. By taking out an interest-only loan they also
minimised their monthly outgoings and improved their cash flow.