If you’ve paid down your home loan somewhat or your property has appreciated in value, you may be able to use your home’s equity to obtain a loan for an investment property purchase.
Knowing how to use your home equity can help you achieve financial goals, but it’s important to weigh the risks—like increased debt and changing interest rates.
Let’s look at what equity is, why using your equity to buy an investment property might be beneficial, and how to do it.
What is equity?
Equity is the difference between the market value of your property and the balance remaining on your home loan.
Say your property is worth $1,000,000 and you owe the lender $200,000. Your total equity is $800,000.
However, not all of that equity is accessible. This is where usable equity comes in. Banks typically lend you up to 80% of the value of your home, minus your existing loan balance.
In this example:
80% of the property’s value = $800,000
Subtract the loan balance = $800,000 − $200,000
Usable equity = $600,000
In some cases, you may be able to borrow more if you take out Lenders’ Mortgage Insurance (LMI).
Why use your equity to invest?
Using the equity in your home to purchase an investment property can be a powerful strategy. But it’s important to weigh both the benefits and potential risks. That’s why it’s essential to seek professional advice – whether financial, legal, or tax-related – to ensure this approach aligns with your goals and circumstances. The team at Orchard Mortgage Brokers, Mooloolaba (Sunshine Coast) & Paddington (Brisbane) are here to help.
Pros
No need to save a deposit
Use the equity in your home as the loan deposit to purchase your next property, avoiding the need to save up deposit funds. It means you can re-enter the property market sooner and seize the opportunity to purchase an investment property when it arises.
Potential tax benefits
Buying an investment property may come with tax benefits. For instance, some investors use negative gearing to offset taxable income. You may also be able to claim deductions on expenses like interest, property management fees, and maintenance.
Expand your property portfolio
Investing in property allows you to potentially benefit from long-term capital growth and rental income. Over time, this could help grow your wealth across multiple properties.
Increase your borrowing capacity
Using your equity may allow you to borrow more than you could with just your income and savings, enabling you gain approval on a larger home loan and target higher-value investment properties.
Cons
Increased debt
Borrowing against your equity increases your loan amount and total debt. You’ll need to ensure you can comfortably service a larger mortgage, including your home and investment loans.
Market risk
If the value of your investment property falls, your overall equity position could be negatively impacted, potentially placing you in negative equity.
Tax implications
You may be liable for capital gains tax when you sell your investment property. Be sure to discuss the tax implications with your accountant before making a move.
How to Use Your Equity to Invest
1. Refinance your home loan to access equity
Refinancing your current mortgage is a common way to unlock equity. You take out a new loan to pay off your existing home loan, plus borrow extra using the equity in your home. That extra amount can then be used as a deposit for your investment property.
2. Home loan top-up
This involves increasing your current home loan to access available equity. The funds can then be used as your deposit for a new investment property loan.
3. Cross-collateralisation
In this setup, your existing home is used as additional security for the loan on your investment property. You’ll end up with two loans—your existing home loan and a new loan one secured by both properties.
4. Line of credit
A line of credit allows you to draw on your usable equity as needed, and you only pay interest on the amount you use. It offers flexibility and can be a smart way to fund a deposit or other investment-related costs.
Like to know more about equity?
There are also other finance options available—like supplementary loans or home equity loans—that may suit your situation. At Orchard Mortgage Brokers, we help homeowners Australia wide unlock their equity and build their investment portfolio with confidence.
Call us on (07) 5475 4500 Mooloolaba & Paddington
Email: [email protected]
Let’s chat about how you can make your equity work for you. We’re here to help.