Alright, homeowners, listen up! One of the most powerful tools sitting right under your nose (or should I say roof?) is the equity you’ve built up in your property. That equity can be the key to grow your investment portfolio. But how exactly do you use your home’s equity to buy an investment property? Let’s break it down.
What is Equity?
Equity is the gap between what your home’s worth and what you still owe the bank. For example, if your house is worth $800,000 and you’ve got $500,000 left on your mortgage, you’ve got $300,000 in equity to play with. Nice, right?
The best part? You don’t need to sell your home to use that equity. You can leverage it and still keep living your best life, making it a fantastic way to get into the investment property game.
How Much Equity Can You Use?
In Australia, most lenders will let you borrow up to 88% of your home’s value. So, using the example above, you could potentially borrow 88% of that $800,000 value, which gives you $704,000. Now, if you still owe $500,000 on your mortgage, that leaves you with $204,000 in usable equity.
If you’ve been smashing those mortgage repayments or your property has gone up in value, you might be sitting on a nice chunk of equity that could help fund your investment property purchase.
Steps to Using Equity to Buy an Investment Property
- Assess Your Equity Position
The first step is figuring out how much equity you’ve got. Your MTM broker can arrange a property valuation through your current lender, or if we find a better lender for you, we can organise it through them as well. At MTM, we work with a wide range of lenders who offer these valuations at no cost to you.
- Speak to a Mortgage Broker
I might be biased, but having a chat with a mortgage broker is important. We can take a good look at your financial situation, figure out how much equity you’ve got, and help you understand what you can borrow for your investment property. We’ll also find the right lender that suits your needs perfectly.
- Determine Your Loan Type
Once you know how much equity you can access, we will help you to decide how to structure your loan.
It’s important to keep tax deductible debt (the equity loan) and non-deductible debt (your original home loan) separate for accounting purposes.
We’ll also make sure that your home, and the new Investment Property are not cross-collateralised, to ensure that you have maximum control over your portfolio. For more information on cross-collateralisation, download Part 1 and Part 2 cross-collateralisation PDFs.
- Use Your Equity as a Deposit
The equity you access can be used as the deposit on your investment property, which typically needs to be at least 12% of the property’s value. You will also be able to use it to cover all the other costs, like stamp duty and legal fees.
In the example above, using $204k of the released equity, this would allow you to purchase an investment property up to $1.2M. That said, while you might have enough equity to purchase a $1.2M investment property, you’ll still need to evidence your ability to repay the loans. This is called “servicability”, i.e. your borrowing capacity.
- Get Your Finances in Order
While equity can be a powerful tool, lenders will still assess your ability to repay the loan based on your income, expenses, and credit history. Ensure your finances are in good shape to increase your chances of loan approval. If you’re not sure what “good shape” means, it can vary from lender to lender, so make sure you speak to us before applying for the loans. If you apply for a loan, and it’s knocked back, this will show on your credit report and may lower your overall credit score.
Benefits of Using Equity for Property Investment
- No Need for a Cash Deposit: By leveraging your equity, you can purchase an investment property without needing to save up a large cash deposit.
- Wealth Creation: Property investments can generate long-term capital growth and rental income, increasing your wealth over time.
- Maximise Borrowing Power: As property values rise, you may continue to build more equity, allowing you to expand your portfolio even further.
- What if you have cash to pay the deposit?
Assuming you still have a non-deductible home loan, you’d be better off using your cash to pay down this loan, as there’s no tax benefits on this loan, because it was used to buy your home (which is a non-income generating asset). For example, if you have $500k owing on your home loan, and $150k savings in the bank, instead of taking the $150k savings and using it to buy the Investment property, you’re better off paying down your home loan to $350k, then creating a separate ‘equity’ loan of $150k, and use this as the deposit for your investment property. Overall, your aggregate borrowings will be the same, however you’ll have less non-deductible debt and more tax-deductible debt to offset the rental income you’ll receive.
Final Thoughts
I’ve been helping property investors navigate complex lending for 15 years, and using equity to buy an investment property is one of the smartest ways to grow your wealth in Australia’s property market. With a solid plan and the right advice, you can turn your home’s equity into a stepping stone towards financial freedom. Our friendly, down-to-earth mortgage brokers will make sure you’re making the best decisions for your financial future. Give us a call on 02 6188 4555 or make an appointment for a free, no obligation consultation.
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