Thinking of Using Equity to Buy an Investment Property
If you already own a home and it’s grown in value, either with inflation or with hard work and renovation or you’ve paid down some of your loan, you might be sitting on a valuable tool for building your property portfolio: Home Equity.
Have you thought about how you could use that Home Equity? You could do further renovations, put in a pool, but a new car or use equity to buy investment property.
Here’s how home equity works: the difference between equity and usable equity. How that usable equity can help you to buy an investment property without necessarily needing a fresh cash deposit.
What Is Equity?
Equity is the difference between what your property is worth and what you still owe on it.
For example, if your home is worth $800,000 and you owe $500,000, you have $300,000 in equity.
As you pay down your loan and as your property grows in value over time, your equity increases.
This is money (savings) that’s tied up in your property. And unlocking that equity can be one of the most powerful ways to start investing in property.
Equity v Usable Equity
Ok, so you understand the difference between the value of your home and the loan is the equity. The part of that equity that you can use is called the usable equity. So how much of that equity can you use?
How Usable Equity Works
You generally can’t access all your equity, lenders usually let you borrow up to 80% of your property’s value without needing Lender’s Mortgage Insurance (LMI).
This is called your usable equity.
Using the earlier example:
Property value: $800,000
80% of value: $640,000
Amount still owed: $500,000
Usable equity: $140,000
That $140,000 could potentially be used as a deposit (plus costs) on an investment property, without touching your savings.
How the Equity Release Process Works
Awesome Lending Solutions will get your property valued. Importantly, if you have been improving or renovating the home, we will order a physical valuation, not just an electronic one.
Once the valuation comes back, we will use this report to confirm your current equity position.
Awesome Lending will help you access equity, usually through refinancing or by adding a separate loan split against your existing property. (important for tax)
These funds will become the funds to cover the deposit and costs on the investment property.
A separate loan will sit alongside a new loan for the rest of the purchase price.
Settlement on the investment property, just like a normal purchase, using the combined finance.
Awesome Lending Solution will often set the original loan up as separate loan accounts, one for your original home and one for the investment property, even though both are secured against your equity. This keeps things cleaner for tax and record-keeping purposes.
Why Investors Use The Equity Release Strategy
- No need to save a fresh deposit, which can take years
- Keep your savings for other things, like renovations, an emergency fund, or lifestyle goals
- Move faster in the market, since your equity is often ready to use once a valuation is done
- Build a portfolio sooner, rather than waiting to save for each property one at a time
Things to Consider Before You Do This
You’re Increasing Your Overall Debt
Using equity means borrowing more against your home, even if you’re not touching your savings. It’s important to make sure you can comfortably service both loans, especially if the investment property has periods without a tenant.
Interest Rates and Loan Types
Investment loans sometimes have slightly different rates and features compared to owner-occupier loans. It’s worth understanding how the loan is structured and what that means for repayments.
Rental Income and Cash Flow
Lenders will usually factor in a portion of expected rental income when assessing serviceability, but it’s worth running your own numbers too, including rates, insurance, property management, and maintenance costs, so there are no surprises.
Tax Implications
Interest on investment loans is generally tax-deductible, but the details depend on your personal situation. It’s worth chatting to your accountant alongside your broker to make sure everything is structured correctly from a tax perspective.
Market Movements
Equity is based on your property’s value, which can go up or down. It’s worth being conservative in your calculations rather than assuming values will keep rising indefinitely.
Is the Equity Release Strategy Right for You?
Using equity to invest works well if you have a stable income, comfortable serviceability, and a property that’s genuinely grown in value or where you’ve paid down a solid chunk of the loan. It’s less suitable if you’re already stretched financially or your current property has little to no usable equity yet.
Let’s Look at Your Numbers
Every situation is different, and the right structure depends on your goals, your current loan, and your borrowing capacity. At Awesome Lending Solutions and Awesome Wealth, we help clients understand exactly how much usable equity they have and how to structure finance the right way to grow their property portfolio with confidence.