When it comes to getting ahead in Sydney’s property market, there’s a bit of an urban legend; one can only do it through skyscraping income, a shiny slab of inheritance, the bank of mum and dad… or plain good luck.
But as we’ve learnt about legends, they’re usually full of peril, circulated person to person, and well, a bit of old-fashioned fake news.
Perhaps for some buyers, there is that golden ticket to owning a property (and maybe a few more); but for the average property seeker in Sydney’s market, there’s only one way of unlocking the next investment property – strategy. And with that, equity is the key.
Unlike in the Terri Scheer ads, the vast majority of equity gaining investors aren’t white-collared professionals with outrageous earnings; a second property is achievable for virtually anyone with the right investment strategy, professional advice, and a long-term mindset – and we’ll explain how below.
What is equity and how do I use it?
Put simply, equity is the difference between your home’s market value and your remaining mortgage balance. And yep, you can even access it without having to sell your home.
It can be thought of as the value of what you own in your home, calculated by subtracting your mortgage balance from the value of your property.
For instance:
Home value – $600,000
Home loan balance – $450,000
= $150,000 in equity.
As you continue paying your mortgage and as your property value increases, your equity increases over time.
The rule of four
If you have an existing property and are looking to buy another, you’re likely wondering what you can afford in the next. A simple rule of thumb is to multiply your usable equity by four to get your maximum budget.
For someone with $150,000 in equity, this would mean that they could potentially purchase another property for up to $600,000 maximum, of course depending on lending criteria at the time as well as their specific financial situation.
In general, banks will lend 80% of the property’s value. To take the example above, that would amount to a loan of $480,000, where the equity could pay for the deposit, stamp duty and potentially other fees associated with buying.
Things to consider
With property prices soaring over 2021, a number of homeowners have built more equity (and are using it). But does that necessarily mean you should?
As with any loan, it pays to be aware of the risks:
- What are your current debts?
- Do you have a stable income?
- What – and where – are you looking to buy?
These are typically the questions that lenders will be asking, in order to determine your borrowing for an investment property.
Consider not borrowing to your maximum so that you have a buffer for emergencies – and if in doubt, always speak to your lender. Or contact your agent today for some helpful advice!
Prudential Real Estate Campbelltown | (02) 4628 0033 | campbelltown@prudential.com.au
Prudential Real Estate Liverpool | (02) 9822 5999 | liverpool@prudential.com.au
Prudential Real Estate Macquarie Fields | (02) 9605 5333 | macquariefields@prudential.com.au
Prudential Real Estate Narellan | (02) 4624 4400 | narellan@prudential.com.au
