Posted on August 5, 2021
3 ways to know if you’re in a position to borrow if you have equity in your home.
Hundreds of thousands of families have lived in their homes for at least ten years and more. Most households are aware that the values of their home have increased and that’s the end of it. Most people give little thought to the matter.
When you purchase property and the value of the home increases over time, then this increase creates equity.
What is equity? In simple terms we can use the following equation: Equity = Assets – Liabilities. In the context of real estate this is the difference between the current fair market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.
Many people don’t realize that the equity in your home has buying power and the banks will lend money to the owner as they have a valuable security to back the loan.
I meet a lot of clients that have equity in their home, and one of the questions I ask is, ‘How much is your equity earning you?”. If you’re not utilizing your equity to invest, then the answer will be ‘Zero”.
Even though you may have equity in your home, the banks still may not lend you money for investment. There are three major factors that will determine whether you are able to borrow and this will differ for each individual’s circumstances.
1. Do you have enough equity?
The most cost effective way to invest in property is with a 20% deposit. On top of this you need to calculate interest charges, solicitor/conveyancor costs, stamp duty, insurance and handover costs.
A further allocation of funds should be made to cover any shortfall in valuations. Bank valuations are generally conservative and may differ to market appraisals. Of course all of these factors will depend on the valuation of your own home and will also determine the value of the property you will be able to invest in.
2. Are you earning enough to service an investment loan?
Bank lenders base their servicing on future interest rate rises, i.e. they may calculate the loan repayments on interest rates from 7% up to 12% depending on the insurance company insuring the debt. If you don’t have sufficient earnings to cover living expenses and other loans and especially if you’re not saving money, then generally lenders will not approve a loan.
3. Too many inquiries
One of the big mistakes that people of do is to go from bank to bank to see if they can shop for a good deal. All of the inquiries go on to a credit score and are seen by other lenders. If there are too many inquiries, this suggests that you have been declined by other lenders and consequently, you will be regarded as being high risk.
Speaking to one of our expert finance consultants will allow us to determine if you are in a position to borrow and they are better equipped to provide information instead of your local bank manager. If your credit score is untarnished and you have sufficient income there is no reason why you should not be able to borrow to invest. With interest rates being so low and with an investment in property that gives you a positive cash flow, then this concern diminishes greatly.
If you’d like any help in getting into any of these Cash Flow Positive solutions, get in touch via the link below.