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, 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.