How do I use the equity in one property to purchase a second property?
How do I use the equity in one property to purchase a second property?Is a question Australian Expat Finance Mortgage Specialist is asked every day. Most Australian Expats strive to own Australian property to protect themselves from future movements in the Australian Property Market. In Australia, there are many tax advantages to be utilised by owning an Australian investment property. But how do you use the equity in your existing property to have a successful second purchase?
It is essential that you ask yourself the following questions
What is my own property’s current Loan Value Ratio (LVR)?
- Your Loan to Value Ratio or LVR is calculated in the following way.
- The loan amount is divided by the property value.
Above is a diagram of a home that is worth 1 million dollars with a loan of $500,000, so it has $500,000 in equity. A 50/50 equity-to-loan split means that the property has a 50% loan-to-value ratio. Let’s ask ourselves some questions:
- How much equity can I use?
- Example:
- Current value = $1,000,000
- Loan = $500,000
- LVR 50%
One key factor is the maximum LVR ratio that lenders allow for expats, which is typically up to 80% of the property value. This means that you may potentially be able to use the remaining 30% equity to support your future purchase.
To continue our example, your current property is valued at 1 million dollars, and you have $500,000 in equity and a $500,000 mortgage. Your future property is also valued at $1 million dollars, you will need to utilise $200,000 of your “Free Equity” to meet the 20% LVR requirement. You will need to keep $200,000 in your current property to secure the new purchase ensuring you have 20% LVR in your current property.
in order to SUCCESSFULLY proceed with your Future purchase, As an Australian expat, it is important to consider that you may need to have a minimum of 20% “free equity”.
Therefore, your $200,000 deposit payment, representing 20% of the purchase price and LVR comes from the value in the existing property that the lender holds as security against the current loan, this leaves 10% that can be used for stamp duty and purchase costs.
Let’s combine the current property debt of $500,000 with the new purchase debt of $1,000,000. Your total mortgage would amount to $1.5 million. This means that after deducting the equity from the purchase, your net mortgage would be $1.5 million, plus up to $100,000 that you have used for costs.
there are several important factors Australian Expats should consider to ensure a successful loan application.
Timing – Ensure your Australian tax returns are all in order, pay off as much debt as possible, and reduce your credit card limits to a minimum.
Income – Your salary and bonuses will be taken into account.
Opportunity – “Attempting” to time the market, but more importantly, being strategic with any movements with the Australian Dollar. The market may also be suffering and becomes a buyer’s market, generating greater bargaining power than at other times.
Taxation – Referring to point one, all your tax returns must be in order before you can obtain pre-approval or approval for your new mortgage.
Depreciation – Obtain a depreciation schedule for your current property; you will be surprised at how much you may be able to depreciate from your property. If it is an appartments, you are able to depreciate the whole building, lifts, plant, pool, common areas, not just your appartment, a percentage of the whole building for 40 years. It’s worth getting advise and getting a Depreciation schedule for your property.
Currency – Some banks value currencies differently and may discount your income currency to protect against movements when converting into the Australian dollar .
Reason – timing – You might be purchasing for children’s schooling, returning home to retire, buying your dream home to live in the future, or a pure investment property focused on capital growth and yield.
When considering purchasing a new property, it is essential for you to consider the following key points:
1.Location
Location: The location of a property plays a significant role in its value and potential for appreciation. Take into account factors such as proximity to schools, shopping centres, public transportation, and amenities like parks or recreational areas. Consider the neighbourhood’s safety, infrastructure, and future development plans, as these can greatly impact your quality of life and potential resale value. Some banks see certain suburbs as a “risk” and will not lend large an LVR as they do to other suburbs.
2. Budget
Determine your budget and stick to it. Consider all costs associated with purchasing a property, including the down payment, closing costs, and monthly mortgage payments. Be realistic about what you can afford to ensure financial stability in the long run.
3. Property Type
Decide on the type of property that suits your needs and lifestyle. Whether it’s a house, apartment, or townhouse, each option has advantages and disadvantages. If you are considering an apartment, consider a boutique development over a large 20+ story complex. Consider factors such as space requirements, strata levies and access to amenities.
4. Size and Layout
Assess the size and layout of the property to ensure it meets your current needs and future plans. Consider the number of bedrooms, bathrooms, common areas, and storage space. Think about how the layout will accommodate your daily activities and potential future changes, such as a growing family or remote work requirements.
5.Condition and Maintenance
Condition and Maintenance: Evaluate the condition of the property and any potential maintenance or renovation needs. A thorough inspection can help identify any hidden issues that may require costly repairs down the line. Consider the age and condition of major systems, such as plumbing, electrical, building and pest inspection.
6. Accessibility
Take into account the accessibility of the property, both for yourself and visitors. Assess factors such as parking availability, proximity to public transportation or major highways, and any mobility-related considerations. Consider how easily the property can be navigated by individuals with disabilities or an aging population.
7. Capital Growth
Research the area’s potential for Capital Growth and development. Look for signs of economic stability, job opportunities, and infrastructure improvements. Investing in a property with good growth potential can provide long-term benefits and increase its value over time. For example, Brisbane and South East Queensland (SEQ) is hosting the 2032 Olympics, and Gold Coast has put its hand up (To be confirmed) to host the 2026 Commonwealth Games.
8. Legal Considerations
Understand the legal aspects of purchasing a property, including zoning regulations, body corporate rules, and any restrictions or easements that may affect your ownership or use of the property. Consult with a solicitor to ensure you have all the information required.
If you have any further questions about “How do I use the equity in one property to purchase a second property?” please reach out. Adam Kingston, Australian Expatriate Finance Mortgage specialist offers complimentary 30 minute online meetings to the Australian Expat community who are wanting to explore unlocking their equity potential in their current properties to help them maximise their borrowing power.
