If you’ve made progress on paying down your home loan or your property has increased in value, you may be able to tap into your home’s equity to purchase an investment property.

Using equity can be a smart move to grow your wealth – but it’s not without risk. It’s important to understand the pros and cons, especially around borrowing more and fluctuating interest rates.

Let’s explore what equity is, why you might use it to invest, and the different ways to access it.

What is Equity? 

Equity is the difference between your property’s current market value and the outstanding balance on your home loan. 

For example, if your home is worth $1,000,000 and your mortgage balance is $200,000, your equity is $800,000. 

However, only a portion of that is considered usable equity. Lenders typically allow you to borrow up to 80% of your property’s value, minus what you still owe. 

In this case: 

• 80% of $1,000,000 = $800,000 
• Minus the existing loan balance of $200,000 
• Usable equity = $600,000 

In some cases, you might be able to access more if you’re willing to pay for Lenders Mortgage Insurance (LMI). 

Why Use Your Equity to Invest? 

Leveraging your equity to buy an investment property can be an effective way to build wealth – but it’s essential to get expert advice to make sure it suits your financial situation and long-term goals. Here are some of the potential benefits and risks: 

Benefits 

• Skip the deposit-saving stage: You can use your home’s equity instead of saving a large deposit, allowing you to enter the market sooner and make the most of opportunities. 
• Possible tax advantages: Investment properties can come with tax benefits, such as deductions for interest, maintenance, and property management fees. Some investors also use negative gearing strategies. 
• Grow your portfolio: Investing in property can create rental income and long-term capital growth across multiple properties. 
• Boost your borrowing power: With equity, you may be able to borrow more than you could with just savings and income alone. 

Risks 

• Higher debt: Using equity means taking on additional borrowing. You’ll need to manage repayments on both your home and the investment property. 
• Market fluctuations: If property values fall, you may risk going into negative equity – where your loan exceeds your property’s value. 
• Tax obligations: When you sell an investment property, you may have to pay capital gains tax. Be sure to discuss this with your tax adviser. 

Ways to Access Your Equity 

There are a few methods to unlock your home’s equity for investment purposes: 

1. Refinance Your Home Loan 
   Refinancing involves replacing your current mortgage with a new one that includes extra funds – your usable equity. This additional amount can then be used as a deposit for the investment property, with a new loan to cover the remaining cost. 
2. Home Loan Top-Up 
   If your lender allows it, you can apply to increase your existing loan (a top-up) to access funds. This gives you cash for your investment deposit without changing your loan provider. 
3. Cross-Collateralisation 
   This approach involves using your current property as security for the new investment loan. The lender combines both properties as collateral, resulting in two linked loans: one secured by your home, and one secured by both the home and the new property. 
4. Line of Credit
   With a line of credit, you’re approved for a specific borrowing limit based on your usable equity. You only pay interest on the funds you actually use, which can make this a flexible option for covering an investment deposit. 

Want to Learn More? 

There are other financing options to consider as well, such as a home equity loan or supplementary loan. If you’re thinking about using your equity to invest in property, reach out to us for a personalised chat. We’re here to help you make the most of your opportunities. 

Get in touch with us today to get started.