The quick answer is no – not in the general sense where one needs to be saved up. Over time you may find yourself comfortable with your existing mortgage repayments, particularly if you took your mortgage out a while back – perhaps 5 or 10 years ago, and are facing rates which are at historical lows now. If you are in this position it is also likely you may have built up equity in your property over time, due to both principal repayments and also strong asset growth in the recent rising market.
Utilizing or “leveraging” this equity will allow you to have access to capital for the deposit for your next property purchase. This means that you fund the deposit for your investment by borrowing the deposit itself too. The more equity you have – provided you can meet the servicing requirements, the more you can continue to invest. As time is the most important aspect in the appreciation of any investment, the earlier you can buy more (quality) investments, the better the long-term expected real-return (asset value and potentially rental increases over time too).
Let me explain further; by using your home as security, you’ll be able to borrow back up to 80% (top-up) of the current market value of the home (based on current LVR rules), which means you’re releasing equity that you’ve built up within your home over time.
Ideally, what you want to do (and what we recommend) is that you split bank your investment property from your owner-occupied property. Your current bank will typically (as is their job to try to get all of your business) offer to 100% finance your property by using your home as security. This means using your equity and income to get pre-approved for a new purchase up to a certain dollar value based on your limits – but also will mean your properties are cross-secured.
Another option – known as split banking, would be looking at getting a revolving credit for the deposit required for the investment property.
For example, let’s say you owned a home which is now worth $1m. You have debt against this property with bank A, of $400k. You have been looking at the market, and would like to buy an investment for $500k. Based on current LVR rules for investments (35% deposit and 65% loan) you would need to come up with $175k as a deposit for this purchase. As we are aware you can top-up to 80% on your home, it means we have another $400k of equity in which we can use for funding deposits – in this transaction however we will only need $175k of this. The other $325k will then be funded by bank B – which will take security over your residential investment property. By using this strategy you have successfully 100% financed an investment property, and also kept your investment and personal assets away from one another in the sense that they are not cross-collateralized.
Another thing to consider is the tax deductibility of this debt which relates to the investment property (the portion with both bank A, and bank B).
Understanding these concepts could mean material differences in how quickly you progress on your journey of wealth creation – but also the subtle differences in your ability to protect your assets adequately while also maximizing your tax benefits.
Contact us today to book your free Finance Strategy Meeting.