Many Australian homeowners want to grow their property portfolio but assume they need a large cash deposit to get started. Learning how to buy an investment property using equity shows there is often another path, one that uses the value already built up in your existing home.
This guide explains what equity is, how it can be used toward an investment purchase, and the key things to understand before going down this path.
What Is Equity?
Equity is the difference between what your property is worth and how much you still owe on your home loan. As you pay down your mortgage and as your property’s value changes over time, the equity you hold in your home can grow.
Many homeowners are surprised to learn how much equity they have built up, particularly if they purchased some years ago. General guidance on understanding your home loan and equity position is a useful starting point before exploring your options.
How Equity Can Help You Buy an Investment Property
Rather than saving an entirely new cash deposit, some homeowners use the equity in their existing property to help fund the deposit and associated costs of an investment purchase.
This does not mean you receive cash from your equity directly. Instead, a lender may allow you to borrow against that equity, which can then be used toward the purchase of another property.
Working Out Your Usable Equity
Usable equity is generally lower than your total equity. Lenders typically allow you to borrow up to a certain portion of your property’s value, minus what you still owe, while keeping a buffer in place.
This buffer helps protect both you and the lender if property values move over time. Market reporting on how changing property values affect available equity is a useful way to stay across current conditions.
A lender or mortgage broker can help you work out your specific usable equity based on a current valuation of your property and your existing loan balance. It is generally worth getting an updated valuation rather than relying on an estimate, since even small differences in value can change how much you are able to borrow.
Ways to Access Your Equity
There are a few common ways homeowners structure the use of equity when buying an investment property.
Increasing Your Loan Limit
Some lenders allow you to increase the limit on your existing home loan, giving you access to additional funds secured against your current property. These funds can then be used toward the deposit and costs of an investment purchase.
A Separate Equity Loan
Alternatively, some homeowners set up a separate loan secured against the equity in their home, keeping it distinct from their original mortgage. This can make it easier to track the costs and interest associated with the investment portion of your borrowing.
Risks to Understand Before Using Equity
Using equity to buy an investment property can be a useful strategy, but it comes with risks that are worth understanding clearly.
- Your existing home is used as security, so missed repayments can put it at risk
- Borrowing more against your equity increases your overall debt and repayment obligations
- Property values can fall as well as rise, which affects how much equity you actually hold
- Combining loans across properties can make refinancing or selling more complicated later
- Rental income from an investment property is not guaranteed and may not cover the full cost of holding it
A mortgage broker or financial adviser can help you weigh up these risks against your personal financial situation and goals.
It is also worth researching the rental market in any area you are considering, since ongoing rental income plays a large part in whether an equity funded investment remains manageable. Suburb level insights into rental demand and vacancy trends can help inform this research.
Steps to Buying an Investment Property Using Equity
While every situation is different, the general process tends to follow a similar pattern.
- Get a current valuation of your existing property
- Speak with a lender or mortgage broker about your usable equity
- Confirm how much you may be able to borrow toward an investment purchase
- Research suburbs and property types that suit your investment goals
- Arrange building and pest inspections before making an offer
- Engage a conveyancer to manage the contract and settlement process
Working through these steps with the right professionals can make the process considerably smoother.
It is also worth understanding how loan interest on an investment property is generally treated for tax purposes, since this can affect your overall cash flow. The Australian Taxation Office’s guidance on rental property expenses and deductions is a helpful starting point, alongside advice from a registered tax agent.
Conclusion
Using equity to buy an investment property can help you grow a portfolio without needing to save an entirely new deposit, but it is a strategy that comes with real financial risk. Understanding your usable equity, how borrowing is structured, and what could go wrong is an important part of making an informed decision. General information on planning for property investment costs can also help you prepare before speaking with a professional.
If you are considering this path, it is worth speaking with a mortgage broker and a buyer’s agent about your options. You can also explore seen.com.au to connect with property professionals across Australia and read more articles on buying, selling, and investing in property.
FAQs
1. What is equity in a home loan?
Equity is the difference between your property’s value and the amount you still owe on your home loan. It generally grows as you pay down your mortgage or as your property’s value increases over time.
2. Can I use all of my equity to buy an investment property?
Usually not. Lenders typically only allow you to borrow up to a certain portion of your usable equity, keeping a buffer in place to account for changes in property value.
3. Do I need a cash deposit if I use equity?
In many cases, equity can cover some or all of the deposit and associated costs, reducing or removing the need for a separate cash deposit. This depends on your usable equity and your lender’s specific requirements.
4. What happens if property values fall after I use my equity?
If property values fall, your usable equity may reduce, and in some cases you could owe more than your properties are worth. This is one of the key risks to discuss with a mortgage broker before proceeding.
5. Should I speak with a professional before using equity to invest?
Yes. Because using equity involves borrowing against your existing home, it is worth speaking with a mortgage broker or financial adviser to understand how it fits your overall financial situation and goals.