Will I ever have the money to invest in property?

Your investment deposit could be right under your nose

To invest in property, you’ll need a deposit. It is where many beginner investors give up. They don’t have £25,000, £30,000, or £50,000 sitting in their bank account. Looking at the deposit they might need to buy an investment property, it seems like an unachievable aim. There are thousands of property investors who now have portfolios worth millions of pounds, and every one of them started with next-to-nothing in their bank account.

Some of these investors saved to take advantage of property investment opportunities. If you set a goal and figure out how to save for your first property investment deposit, you could join them. But many more investors unlocked a hidden bank account and found they had the deposit available immediately. I’m talking about the equity in your home.

In this article, you’ll learn:

  • what equity is;
  • how safe it is to use; and
  • how much property investment power the equity in your home could give you.

Welcome to the Bank of home equity

Equity is simply the difference between the value of your home and the amount you owe on it. On average, UK property prices have doubled every ten years. According to the Nationwide UK House Price Index, the average house price in 1996 was £55,169. At the end of 2016, the average house price had increased to £205,937.

If your home is worth, say, £200,000 and you still owe £100,000 on your mortgage, you have equity of £100,000. You can release this equity by borrowing against the value of your home. And you can use the money for a number of purposes. For example:

  • Start a business
  • Buy a car
  • Pay for your children’s university education
  • Extend your home
  • Pay off debts

You can also use it to invest in property.

How much equity is it safe to use?

Now, a lender probably won’t let you take all the equity out of your home. They won’t let your mortgage to 100% of its value. They want a cushion to protect them. We’d never recommend taking all the equity from your home, either. Just like the bank, you’ll want that protective cushion, too, for your peace of mind. So, how much equity is it safe to use?

The ultimate answer is: however much you’re comfortable with.

Remember, when used as a deposit to buy an investment property, home equity works differently. If you buy a car or pay for an around-the-world cruise with the money you release, the money has gone. When you use it to make an investment in property, you’re buying a tangible asset that should grow in value.

Most investors – and lenders – are comfortable with a total loan amount of 75% or 80%.

Going back to our example, here’s how much you could probably borrow comfortably:

Value of your home £200,000
75% of this value £150,000
Outstanding mortgages £100,000
Available equity £50,000

 

What’s your investment power using your home equity?

All lenders have different rules when lending to property investors, which is why you should use a buy-to-let mortgage broker. They’ll find the best mortgage to meet your investment goals.

As a rule of thumb, you can borrow up to 75% of an investment property’s value. In our example, with a £50,000 deposit, you’ll be able to invest in a property worth £200,000.

The easy way to estimate the maximum amount you could pay for an investment property is to multiply your deposit by four. If the equity in your home that you could release is £70,000, you could buy an investment property valued at up to £280,000.

How much can you borrow?

To estimate how much home equity you might comfortably release, simply fill in the following table:

Value of your home
75% of this value
Outstanding mortgages
Available equity  

 

The lender will provide an accurate valuation of your home, but you can get a good estimate by using an online house price calculator. For example, the Rightmove calculator allows you to make an immediate price comparison to similar properties close to you. Simply enter your postcode, property type, and number of bedrooms, and voila!

You could find out how much investment power you have in less than a minute.

Before you rush to find a buy-to-let mortgage….

If you’re a homeowner and have equity in your property, the calculation you just made has probably excited you. Yes, you can invest in property now (and now is always the right time to invest in property).

Before you rush to release the equity from your home, it’s not certain that you’ll be able to borrow against the equity you have. A lender will consider your income, age, marital status and credit score among other factors before agreeing to your request.

Contact one of our team today on +44 (0)207 923 6100, and we’ll be pleased to help you with a heads-up about your eligibility for equity release. We’ll discuss your aims and how property investment could help you achieve your financial goals, and we’ll be happy to help you find an expert buy-to-let mortgage broker.

Live with Passion

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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