I’ve got another question from Tracy (this is her second question of three) and she asked, “How much deposit do we need (just an estimate) in which we can utilize from the equity of our home?”
I’m assuming what she means is she wants to access equity from her home in order to purchase an investment property and she wants to know what percentage she needs (5%, 10%, 20%, etc. . .).
There are two different things that you need to look at in this situation:
- The loan-to-value ratio of your home
- What you want the loan-to-value ratio to be on your investment property.
Let’s start with the home. You will need to stay below an 80% loan-to-value ratio to avoid lenders mortgage insurance when you take out money as an equity loan from your home. This means you only borrow up to 80% of the value of your home. For example a $500,000 valued home 80% would be $400,000.
Depending on your circumstances you could borrow up to 95% but would need to pay lenders mortgage insurance. You would pay that fee out of the money you’re borrowing, by adding it to your loan or in cash.
How much you can borrow depends on your mortgage, the value of your house and whether you want to avoid lenders mortgage insurance.
Once you get the equity loan you now have money to use as a deposit for an investment property. Most people use an equity loan to take out 20% of the investment property (plus stamp duty and other costs) so that they can avoid lenders mortgage insurance. However, I believe it’s possible to take out a smaller amount of about 5% (plus other costs). You could even borrow 40% , use it as a 40% deposit and have a 60% loan to value ratio on your investment property. It’s completely up to you.
Also because you’re using the loan for investment purposes the interest rates on that portion may be tax deductible. When it comes to mortgages it’s what you’re using the money for that determines whether it is a tax deduction or not. If the money is being used for getting an equity loan for an investment then it’s probably going to be tax deductible. If you’re getting an equity loan to buy a boat because you want to go sailing then that’s probably not going to be tax deductible.
Disclaimer: I’m not a certified accountant so this isn’t advise. It’s just what most people do and what is likely to happen in this situation. Always see a professional before you do anything with your money.
As far as the question goes you could borrow as little as 5% plus costs but depending on your lending situation you may need 20% or more plus costs. It all depends on your situation.
Until tomorrow remember that your long term success is only achieved one day at a time.