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.
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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 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,
i.e. 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.