Equity is the difference between what your property is worth today minus your mortgage. How can you use this equity to buy investment property? That’s coming up after this. Hi. My name is Tony Law from Your First Four Houses and my channel is all about helping you achieve financial freedom through property.
If this is your first time here, be sure to subscribe to the channel and hit the notification icon so you don’t miss out on any of the free content I share each week. Before we get into this, I just had to say I’m not FCA approved so before you take any action on any of the content I’m about to share with you here, it’s essential you seek the advice from three different people.
Firstly, an independent mortgage broker with access to the whole of the market. Secondly, please speak to your accountant if you have one. Lastly, but perhaps most importantly, book a call with specialist tax advisor because they’ll tell you exactly how you should buy that investment property. They’re not expensive and it could be the best advice you ever pay for.
First things first, let’s consider how someone would’ve bought their own house perhaps a few years ago that was worth at the time say 200,000 pounds. They would genuinely have put down a deposit and let’s imagine this would’ve been 10% or 20,000 pounds in this example. They would then have paid the 90% balance, i.e. 180,000 pounds, with a mortgage. Obviously, I appreciate the numbers are going to vary from person to person and I also appreciate that some people at the time would’ve taken a repayment mortgage and others an interest-only mortgage. Let’s just try to keep things simple here and imagine that this person took out an interest-only mortgage.
Many years later, hopefully, the property has gone up in value and let’s imagine that today it’s worth 300,000 pounds. Technically, the owner’s initial deposit is still locked up in this property and technically, there’s still a £180,000 mortgage. Don’t forget, this was an interest-only mortgage and so none of the 180,000 pounds has been paid down.
However, the property has increased in value by this much and so today, assuming the property is indeed worth 300,000 pounds if we take off the existing mortgage of £180,000, that means the total equity that’s locked in this property is £120,000. I would suggest this individual has two choices.
They could leave things exactly as they are with this lump of equity locked in the property or they might think to themselves, “Hang on a minute. I reckon some of this equity could be working a little bit harder for me in another property, specifically an investment property.” If that’s the case, I suggest they got three choices as a way to release some of this equity.
They could speak to their existing lender about some additional borrowing. They could take out a second mortgage with a new lender or they could refinance the entire property with a new lender. If this is something that you want to do, once again I must emphasise you honestly need to speak to an independent mortgage broker firstly and take their advice on this.
However, with that said, in my experience, most people would probably lean towards option number three which is to refinance the entire property with a new mortgage if they can. Let’s look at how that process might work. You go to your mortgage broker and together discuss the various mortgage products that are available to you.
This will vary depending on your circumstances and what you ultimately want to achieve. Just for the sake of this example, let’s imagine you have a 75% loan to value type product which means you’re going to borrow 75% of the value of your property. That’s 75% of today’s value I hasten to add.
Your mortgage broker would then pre-approve you with the lender that you’re going to use which means assuming everything’s okay with the property, you shouldn’t have a problem getting the mortgage. Although you can never be 100% sure about that. You then need to get a formal valuation done on the property and your broker can organise all of this for you.
Just be aware there is a fee for this and it’s a non-refundable fee. The surveyor will then come out and confirm the property is indeed worth £300,000 and the lender should then agree to loan you, in this case, 75% of that £300,000 i.e. £225,000. In this way, you just managed to release £45,000 of additional equity which you can now use to go and buy that investment property.
By the way, if this stuff is helping you, I would really appreciate it if you could take a moment to just quickly click on the thumbs up button down there. It really helps me if that’s okay. Now of course what you then buy as an investment property falls outside of what I can really cover here in this video but let me sew just a couple of quick seeds to give you some idea of why this might be worth you doing.
We’ve released £45,000 of equity from our house. Of course, we’re now paying some interest on that so let’s be sensible about this interest rate and imagine it’s 6% which would mean you would actually be paying £2,700 extra in interest payments each year. Let’s again be sensible and take 5,000 pounds off of the £45,000 figure to cover any fees involved in what we’re about to do and so let’s imagine we got 40,000 pounds left as a usable deposit to put into a deal.
We now find a nice little property that we can buy for 160,000 pounds. We put in our £40,000 deposit and get a new mortgage of 120,000 pounds to make up the balance. There are loads of different ways that we can rent this hypothetical place out but let’s imagine that we’re going to turn it into a small, easy-to-manage HMO, which stands for house of multiple occupancies.
Now, after paying the mortgage and all other bills, this place starts to cash flow say £675 per calendar month. Don’t forget, that’s £675 going into your account each month after you’ve paid the mortgage and all the associated bills. If you multiply this figure by 12, we get an annual cash flow of £8,100.
To put it another way, that’s three times what it’s actually costing you in interest payments each year for the additional £45,000 you’ve borrowed out of your own home and you’ve now got two properties, not one. Admittedly, what I just shared here is an idealised example of a very straightforward purchase and in reality, there’s obviously more to it than this.
Thank you.
Source Link: https://www.youtube.com/watch?v=VpZ_9prJ81E
