Sixty per cent of people looking to buy an investment property before mid 2011 planned to access equity in their home to fund all or part of that purchase, according to the latest Mortgage Choice property survey.
This response reveals that there’s still a high proportion of ‘mum and dad’ investors who don’t comprehend how to use equity to buy additional properties, and feel they must first repay their mortgages, said Mortgage Choice spokeswoman Kristy Sheppard.
In addition to using the equity balance, which acts as the loan security and the cash deposit substitute, meeting the lender’s serviceability criteria is also important, said Sheppard. And on loans that equate to more than 80 per cent of the property price, adds Sheppard, lenders mortgage insurance must also be factored into borrowing costs.
Risk is also a consideration when accessing equity, said Sheppard.
"Before accessing your equity it is necessary to establish whether you can comfortably afford higher loan repayments and which, if any, lender is willing to lend to you," she said.
Mortgage Choice identifies three common types of equity finance:
1. Loan top-up – is essentially a mortgage extension to fund another property purchase. Extra funds are usually made available via a lump sum payment with interest payable on the entire top-up amount.
2. Line of credit – allows a borrower to withdraw funds in addition to a home loan amount, up to a limit set by the lender. Interest is also payable on these funds. Line of credit loans generally attract a higher interest rate, are often interest-only and must be carefully managed.
3. Refinancing – allows a borrower to move to a different lender and loan product to increase the home loan amount. It’s important to shop around as lenders offer different features, fees, interest rates and measure borrowing capacity differently.
Source: API Magazine
