How To Use Equity To Buy Investment Property | Property Investing | Mortgage Finance / Refinance

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, ie 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 a 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 an 180,000 pound 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 pounds, that means the total equity that's locked in this property is 120,000 pounds 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, not mine 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 [inaudible 00:03:58] 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 you 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 pounds and the lender should then agree to loan you, in this case, 75% of that 300,000 pounds, ie 225,000 pounds In this way, you just managed to release 45,000 pounds 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 pounds 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 pounds extra in interest payments each year

Let's again be sensible and take 5,000 pounds off of the 45,000 pound 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 pound deposit and get a new mortgage of 120,000 pounds to make up the balance There's 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 occupancy Now, after paying the mortgage and all other bills, this place starts to cash flow say 675 pounds per calendar month

Don't forget, that's 675 pounds 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 the annual cash flow of 8,100 pounds 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 pounds 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 I do appreciate that

To help you, I've actually put together a free 50 point checklist that guides you through every step that you need to take when buying that first investment property You just run down that checklist, ticking off the boxes as you go to make sure that you don't miss out on anything really, really important Just click on the link at the end and you can download that for free with my compliments I would love to hear your thoughts on this strategy if this is something you're about thinking of doing yourself If you got any questions, just feel free to drop them into the comments section below and I'll be sure to reply to them

Also, be sure to subscribe by clicking here so you don't miss out on any of the free content that I share each week and don't forget to grab that 50 point checklist because you're going to find it really helpful when buying that first or indeed next investment property My name is Tony Law from Your First Four Houses and I look forward to seeing you in the next video Thank you

Source: Youtube

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