- Written by Melanie Toye, August 2, 2013
You have equity from your home and you want to use this equity for renovation. However after speaking with a mortgage professional, you soon realise there are a lot more options you can use your equity for.
It starts off easy enough, you can renovate your home to your dream home. But what if you use the equity as a deposit to buy a second property? There is that possibility. Or you could use the equity as a deposit for a holiday home. Let us explore each of these three options:
Using equity to renovate
The first option is a great way to make your home really live up to its potential. With renovating you need to think about two points. Do you want to renovate and sell in this market? Or do you want to renovate and plan to stay in your home for another 3-5 years? What you need to take into consideration is, if you do decide to sell in 3-5 years time, your renovation could be out of date or even unlikeable to the average buyer.
Using equity for a deposit on another property
The second suggestion, is to use the equity in your home to put a deposit down on a second property. Here is what you need to research before jumping into this -
- How much can you borrow with the amount of equity you have?
- How much will the repayments be and can you honestly afford two mortgage repayments?
- Find out from the real estate agent how much your second property is anticipated to be rented out for. Ask for the lowest to highest price bracket.
- Get a second opinion from a different real estate agency.
- Then work out if the rent will cover the second mortgage and if not can you pay the additional amount. Do not forget there may be several months without being paid rent. Also allow for building maintenance costs, body corporate fees etc.
What is the advantage of buying a second property with the equity from your home? You can receive a second income and get tax benefits. You can then use that second income to renovate your home.
Do you see how that works? Your investment is paying for your luxuries in life, rather than your main income source. You could even save the second income to eventually buy a third property to add to your portfolio.
Using equity to buy a holiday home
The third option is similar to the second, except you also need to look at if the high seasons leasings can cover the low season, if you are renting your holiday home out to help cover the mortgage repayments. A holiday home is great for you and your family to visit and explore an area you love. Buying a holiday home takes out the expense of holidays as you do not need to pay for accommodation, just the mortgage. You can also go on spontaneous getaways throughout the year, because you have a place to stay.
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