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 use your equity to buy an investment property, and how to do so.
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 will typically lend you 80% of the value of your home, minus your existing loan balance.
In this example:
In some instances, you may be able to borrow more if you take out Lenders’ Mortgage Insurance (LMI).
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.
Let’s take a closer look at some of the key advantages and potential drawbacks of using your equity to invest.
Refinance to access equity
Refinancing to unlock your equity is a popular option. This involves taking out a new loan to pay off your old mortgage, with some money left over – that is, your equity. You can then use that money as a deposit, and take out a new loan for the investment property.
Home loan top up
A common way to borrow against the equity in your home is to get a home loan top up or increase. This involves increasing your current mortgage limit to allow you to access the funds (which can then be used for a deposit for the investment property).
Cross-collateralisation
Cross-collateralisation involves using your home as collateral and adding it to the new investment property loan, to help get the purchase over the line. In this scenario, you’d end up with 2 loans – the original mortgage secured by your home, and the new mortgage secured by your home and the investment property.
Line of credit
Another option is to set up a line of credit and use the money as a deposit for your investment property. With this scenario, your lender would approve you for a specific amount, based on your usable credit. The benefit of a line of credit is that you only pay interest on the amount that you borrow, rather than the entire limit.
There may be other finance options to help you use your equity to buy an investment property (such as a supplementary loan or home equity loan).
To get started, give us a call today to talk through how you can unlock your equity – we’re here to help!