Frequently Asked Mortgage Questions
1. How do I use the equity in my property to buy an investment property?
Your home equity is the difference between your property's market value and the balance of your mortgage. If you've owned your home for a few years, there's a good chance you've built up some reasonable equity, and this can be a valuable resource. The great thing about equity is that you can use it as security with the bank and borrow against it.
You can use your equity for whatever the banks allows. New LVR restrictions and continuing changes to bank rules effect what you can do, but generally:
- to extend/ improve your home
- business purposes
- to buy a car
- to go on a holiday
How to use for property investment in Auckland:
Value of your property x 80% = $________
Minus your debt = $________
So for example, using the method above, if the value of your home is $750,000 and your debt is $400,000:
$750,000 x 80% = $600,000
Minus the $400,000 debt against your home = $200,000 of useable equity.
If buying an investment property in Auckland, you will need at least a 30% deposit.
This $200,000 of useable equity will enable you to buy and investment property for up to $666,000. This is because $200,000 is 30% of $666,000.
The case is not only what you can do with the equity in your property, but what you should do. Seek advice to calculate how much equity you have available and to obtain advice on how to make smart decisions.
2. What differences will overpayments on my mortgage make?
When taking on a new mortgage, go over your long-term goals with your partner. Some homeowners want to stay in their current home forever, while some may see it as a stop-gap with future plans to change suburbs, upsize, or downsize their home. Either way, you may consider overpaying your mortgage if you have excess cash flow.
For example, on a $400,000, 25-year mortgage –
A $50 per week overpayment will save you $66,481 in interest over the life of the mortgage and knock four years off.
A $150 per week overpayment will save you $147,084 in interest over the life of the mortgage and knock 8 years 10 months off.
Check with your adviser on whether this is the best option for you, mortgage overpayment limits, and correct structure for maximising the benefit.
3. Will another bank say 'yes' if my bank has already said 'no'?
Banks all have different approaches, policies, and view property type, location, and income type differently. It may even depend on which member of staff you talk to or even the time of year you approach the bank.
The good thing is that they are all not the same. So, when one bank says NO, it does not mean another will not. You need to talk to someone who knows what each bank will and will not do and how to present an application in a favourable light. The worst thing you could do is sit on your hands and do nothing as a bank has told you to come back in 12 months.
4. How can parents help their children get onto the property ladder?
Family assisted mortgage options
With the property market getting away from first-time buyers, we are seeing more and more parents assist their family buy a home.
The two main methods are:
- Going guarantor
Equity in the parents' property is used in place of deposit on the children's home. The children are responsible for repayments on the extra debt secured on the parents' home. Hopefully as the children's home value appreciates over the next several years, they will be able to top-up their own mortgage to repay the portion on the parent's property.
All parties must seek legal advice and understand that the parents will be liable if the children were to default on their mortgage.
- Gifting a deposit
The parents gift a deposit to the children. The transferred money should be confirmed as a gift in writing. The parents are able to do this by topping-up their own mortgage or by using other sources. Again, all parties should seek legal advice.
5. How can I safeguard myself against interest rate rises?
Set a realistic figure that you believe interest rates may rise to and work out how much your mortgage repayments will be at this level. Then set your repayments to this level but put the extra into your revolving account. This conditions you to repaying at that level and creates a buffer for when rates do rise.
For example, on a 25 year, $400,000 mortgage:
4.5% = $2,244/ month
7% = $2,828/ month
In this case, you would pay the extra $584 into your revolving account on the mortgage.
You should also seek advice when deciding on fixing your mortgage rates. You need to understand how long rates may stay at a particular level and put in place a strategy which allows you to make the most of the shorter, lower rates, as well as ensure you are making the most of good rates for the next several years
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