How to use your home equity to buy another property

Using the equity in your own home to help you invest in a second property may be easier than you think.

Once you know how it works and what to look out for, it might be the next step to boost your property portfolio and financial security.

What is equity?

Equity is the value of your home minus the existing debt. For example, if your home is valued at $500,000 and you still owe $250,000 then you have $250,000 in equity. The best thing about equity is that it grows as the value of your home increases.

Equity v usable equity

There’s a difference between your total equity and what you can use. Usable equity is generally calculated as 80% of the current value of your property, less the debt. So, if we stick with the figures we used earlier, on a $500,000 property you could borrow up to $400,000 (80%), minus the $250,000 you still owe. This means your usable equity is $150,000.

How do I use equity to buy another property?

When you know how much equity you have, you can access it by refinancing your home loan. Essentially, you’re taking out a new loan to cover what you owe as well as reborrowing the money you’ve paid off, to get access to that $150,000. You can take that equity as a lump sum or as a line of credit for you to use towards another property.

Lump sum vs line of credit

Lump sum as a deposit

When you’re ready to buy you can use the equity as a lump sum deposit to secure your investment loan and cover stamp duty, legal costs and other fees. You then take out a second loan to cover the remaining cost of the investment property and start paying interest on both loans straight away.

For example, on a property purchased for $300,000, you might use $60,000 of equity as the 20% deposit, and another $15,000 to cover your costs. You would still need to take out a separate investment loan for $240,000 for the remaining 80% of the purchase price.

As a line of credit

Accessing your equity as a line of credit is like having a huge credit card limit – and you only pay interest on what you spend. You can also combine a line of credit with an offset account, so money in that account reduces the interest on your loan.

A line of credit can be useful if you haven’t yet decided on a property to buy or you want to use the equity to buy more than one property. You could decide to buy two properties at $300,000 each by splitting the $150,000 equity into two lots of $75,000 to cover two deposits.

Tip: When you’re ready to buy, use a free property report to get across property market data including estimated value, sales and rental history, suburb insights and other properties in the area.

What to look out for before accessing your equity

  • Are sure you can handle the extra financial commitment? Your lender needs to be sure you can afford to repay your loan, manage any periods when the investment property may be vacant, and cover ongoing expenses like maintenance, rates, any strata fees and any unexpected charges.
  • If you take out a line of credit, are you disciplined enough to only use the money for investment, and not be tempted to take an overseas trip or buy a new car? 
  • Beware of cross collateralisation – this is when your investment loan is secured by your own home as well as the property you’re buying. If things go wrong, you risk losing both, so it’s a good idea to have separate loans for each property.

Whichever way you’re leaning, the first step is some sound financial advice.

The rewards of equity for investment

Using the equity in your own home can provide a great opportunity to break into the investment market. You’re then building equity in two properties, not just one. There’s also tax benefits and long term financial rewards in owning investment property.

Like to know more about accessing equity to make your money work harder? Contact QBANK online or call 13 77 28.

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Investment

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