How to use Home Equity to purchase an Investment Property
Unlock Financial Independence Using the Equity in Your Home
For many Australian homeowners, the idea of achieving financial independence feels out of reach. But if you own your home, you may already have a powerful tool to build wealth: your home equity.
Your equity isn’t just a number on paper—it’s the key to unlocking opportunities, particularly in property investment. As a specialist mortgage broker in investment property finance, I’ve helped countless homeowners turn their equity into wealth. In this blog, I’ll guide you through the process step by step, using straightforward explanations and real-world examples.
What Is Equity?
Let’s start with the basics: equity is the portion of your home that you truly own. It’s calculated as the difference between your home’s market value and the remaining balance of your mortgage.
How to Calculate Your Equity
If your home is worth $900,000 and your mortgage balance is $500,000, your equity is:
$900,000 - $500,000 = $400,000.
It’s that simple! But remember, not all of this equity is accessible for investment.
How Much Equity Can You Use?
Lenders typically allow you to borrow up to 80% of your property’s value, minus what you owe on your mortgage. This is known as your usable equity.
Using the same example:
80% of $900,000 = $720,000
Subtract your mortgage balance of $500,000
Usable equity = $220,000
This $220,000 could become a deposit for an investment property, giving you the means to enter the property market without needing to save a large sum of cash.
Why Use Equity to Invest in Property?
Leveraging your home equity is one of the most effective ways to grow wealth. Here are the key reasons why this strategy works:
1. Start Sooner
Saving for a cash deposit can take years, especially with property prices steadily rising. Using your equity allows you to invest in property sooner, so you can start benefiting from capital growth earlier.
2. Build Wealth Through Leverage
Leverage is the concept of using borrowed money to invest. By using your equity as a deposit, you’re essentially using one property to help you buy another. This strategy can help you grow your portfolio faster, as your assets appreciate over time.
3. Passive Income Potential
Investment properties generate rental income, which can help offset the costs of your loan repayments. Over time, this income can contribute to your financial independence by supplementing your regular earnings.
4. Tax Benefits
Investment loans often come with tax advantages. For instance, the interest you pay on your investment loan is generally tax-deductible, which can reduce your overall tax bill.
5. Long-Term Financial Security
With the right strategy, your investment property will grow in value while your tenants pay down the mortgage. This creates an asset you can use to fund your retirement, build generational wealth, or even reinvest into additional properties.
How Does It Work? A Step-by-Step Guide
Using equity to invest in property may sound complex, but it’s a straightforward process when broken down into manageable steps:
Step 1: Assess Your Equity
The first step is understanding how much equity you have. A professional property valuation will give you an accurate picture of your home’s current market value, which helps determine your usable equity.
Step 2: Review Your Finances
Before diving in, it’s essential to review your overall financial situation. Ask yourself:
Can I afford the repayments on a new investment loan?
Do I have a financial buffer for unexpected expenses, like maintenance or interest rate rises?
A broker like me can help you answer these questions.
Step 3: Talk to a Specialist Broker
This is where I come in. I’ll assess your borrowing capacity, identify the best loan products for your needs, and structure your finance to make the most of your equity while protecting your financial wellbeing.
Step 4: Access Your Equity
Once we’ve determined how much equity you can use, we’ll work with lenders to access it. This could involve refinancing your current mortgage or setting up a new loan secured against your equity.
Step 5: Find the Right Investment Property
With your finances in place, you can start your property search. The ideal investment property will depend on your goals, whether you’re looking for high rental yields, long-term capital growth, or a mix of both.
Step 6: Purchase and Manage
Once you’ve secured your property, you’ll start receiving rental income. This income can be used to cover some or all of your loan repayments, helping you manage the costs of your investment.
Example: Using Equity to Build Wealth
Let’s look at a practical example to show how this strategy works in real life.
Starting Point
Your home is worth $900,000.
Your mortgage balance is $500,000.
Your usable equity is $220,000 (80% of $900,000 - $500,000).
The Investment Property
You use $200,000 of your equity as a deposit to buy an investment property worth $600,000. You take out an investment loan for the remaining $400,000.
Rental Income
The property generates $500 per week in rent ($26,000 annually). This income helps cover your loan repayments, which might be around $24,000 per year, depending on your interest rate.
Capital Growth
If the property increases in value by 5% annually, in 10 years, it could be worth over $977,000. This means you’ve gained more than $377,000 in equity, on top of what you started with.
Outcome
By leveraging your home equity, you’ve created a valuable asset that grows your wealth while providing rental income.
Risks to Consider
While property investment offers significant benefits, it’s important to be aware of the risks:
Market Fluctuations: Property values can go up or down. A short-term drop in value might affect your equity and borrowing power.
Interest Rates: If rates rise, your loan repayments will increase. This is why it’s essential to budget for potential rate hikes.
Vacancies: If your investment property sits vacant for a period, you’ll need to cover the full cost of the loan.
With careful planning and guidance, these risks can be managed effectively.
How I Can Help You
As a specialist property investment mortgage broker, my role is to guide you through this process, step by step. Here’s what I can do for you:
Assess your current equity and borrowing power.
Find the best loan options tailored to your needs.
Structure your loans to maximise tax efficiency and flexibility.
Help you understand the costs and risks involved.
Investing in property is a big step, but with the right advice and planning, it can be a smooth and rewarding journey.
Tips for First-Time Property Investors
If you’re considering using your equity to buy your first investment property, here are a few tips to set yourself up for success:
Do Your Research: Understand the local property market, rental demand, and growth potential before making a purchase.
Think Long-Term: Property is generally a long-term investment, so be patient and focus on building wealth over time.
Start Small: You don’t need to buy a million-dollar property. Start with something affordable and build from there.
Seek Expert Advice: Work with a trusted mortgage broker, financial advisor, and property manager to make informed decisions.
Your Path to Financial Freedom
Using your home equity to invest in property isn’t just about building wealth—it’s about creating financial independence. Over time, your investments can provide a steady income, greater financial security, and the freedom to live life on your terms.
If you’re ready to explore your options, I’m here to help. Let’s chat about how we can turn your home equity into a powerful tool for building your future.
By leveraging your home’s value today, you’re investing in a better tomorrow. Take the first step toward financial independence—your dream is closer than you think.
