Using Home Equity to Invest in Property
Most Australians have no idea what their property is even worth. They find themselves thinking all the time about the mortgage, but not the equity that the property is quietly building in the background. So using home equity to invest in property is generally the farthest thing from their mind.
What is Home Equity?
Home equity is the difference between the current market value of your home and the amount you still owe on your mortgage.
According to CoreLogic, the average Australian homeowner has 50% equity in their home, without even realising it.
How does this happen?
- You buy a property for a given value, say $625,000
- Next you take a loan for 80% of that value, which is $500,000
- Then you concentrate on paying your mortgage
- Property increases in value
- Let’s assume that all you are paying on your loan is the interest portion
- Over the next say, 8 years, the property value increases to $1,000,000
- Your loan is still only $500,000
Therefore to calculate your equity:
Valuation = $1,000,000
Mortgage = $500,000
Equity = $500,000
Let’s use these very rough figures as an example. Of course, everyone’s situation is different and you should always seek expert advice, though for the purpose of this exercise, let’s just use these numbers to keep the calculations simple.
So How Do You Find Out What Your Home Is Actually Worth?
The first step on this journey is to get a valuation. There are several types of valuations you can get, but in this case, all you need is a “bank valuation” to get started.
Now it’s important to note here that not all banks value property the same. Valuations are inherently subjective, or at the very least subject to algorithms. None of them are perfect.
Banks usually conduct “desktop valuations”, which means they use software and calculations to tell you what they think a property is worth. A bank valuation by definition is generally quite conservative.
Why?
In very general terms, banks loan money based on their risk and risk is calculated on what they think the property is worth if you are forced to sell. They want to minimise their risk, so they give a conservative valuation.
The reason different lenders come up with different valuations is because they all use different software. They might be similar, but they are definitely not the same. This can become important later in this story, as a higher valuation means more equity, which means more capital you can access to invest.
Got Equity in Your Home? Here’s How You Could Turn It Into a $1 Million Investment
So let’s say you’ve just secured a valuation on your property of $1m and your mortgage is $500k.
Your first port of call is to go to your lending adviser and see what you can access up to 80% LVR (as this generally means no additional fees or LMI to pay). After doing due diligence, in this example, the bank might be willing to lend you up to 80% of the value of your property (without paying LMI), which means you can now access an additional $300k.
Valuation = $1,000,000
Current mortgage = $500,000
Current mortgage = $500,000
New loan = $300,000
New total 80% mortgage = $800,000
What Can You Do With $300K Worth of Equity?
Here’s a smart way we’ve seen people use it:
- 💰 $100k cash for purchase costs (including stamp duty) and the remaining as a cash buffer to use in the future
- 🏠 $200k deposit on an investment property
And when you go back to the lender with a $200k deposit, many of them are willing to loan 80% of the new investment property value, which means you can now also:
- 🏦 Borrow $800k from a lender to buy that investment property
That gives you:
- A $1 million investment property
- A $100k cash buffer – for purchase costs and other expenses
- Another asset growing in value over time
What Just Happened?
Many clients often talk about the first time someone shows them how these figures work. They think it’s a magic trick (or surely illegal). How could you possibly buy a second property without having to save any money?
The truth is that your property works hard for you every day. Most Australian property has continued to increase in value over the long term. By simply holding onto property and paying the mortgage, the property value is generally rising whether you like it or not.
Have you ever heard your grandparents tell you what they purchased property for? I’d guess it was a lot more than what it’s worth today.
At the moment most clients understand how this works, they can clearly see how people are able to increase their wealth by using home equity to invest in property. The hardest step on the property ladder is saving for your first deposit. If you buy smart and can pay your mortgage, time and compounding does the rest. Save your first deposit once, then let your home save the next deposit for you.
Once the property has increased in value and you can draw that equity to use for a deposit, the bank is typically going to loan you the rest of the purchase price. Just like that (as long as you show you can service the loans), you own investment property too. For those with large portfolios, they simply just keep repeating this process.
Here’s What You Need to Consider Before Accessing Your Home Equity
The first thing you need to do if this is something you are interested in, is to speak with an expert who understands how all this works. Everyone’s circumstances are different and what might work for one investor simply doesn’t stack up for another. There is considerable opportunity if approached with the right level of risk and the support of an expert team around you.
Benefits of Using Home Equity to Invest in Property:
✅ No need to save a new deposit from scratch
✅ You retain ownership of your current home
✅ Investment property provides potential for rental income and long-term capital growth
✅ Interest on the investment loan can become tax-deductible (speak with your accountant)
What Are the Risks?
It all stacks up on a spreadsheet, but like any strategy, there are a few things to consider. This is why you need a team of experts around you to walk you through the process from A-Z. Get it right and you put your family on a very strong path. Get it wrong and you could end up losing everything.
Here are the first things to consider:
- 📈 Your loan size increases.
- You need to understand your numbers to make sure you can service the repayments.
- ⚠️ If property prices drop, your equity may reduce.
- Although most good property in Australia has increased in value over the long term, this isn’t the case for all areas and definitely not in the short term, especially in certain financial climates.
- 🧮 Interest rates and cash flow must be considered carefully.
- What happens if interest rates rise? What happens if they rise significantly? You need to plan for the worst case scenarios because selling property when you don’t want to can get very expensive.
This is why we strongly recommend working closely with a lending adviser and your tax adviser. Good advisers have seen different financial climates and have shown clients how to weather the storm.
Frequently Asked Questions
Can I use home equity to invest in property, without selling my home?
Yes, of course! This is the real power of equity. You keep your home, find out what it’s worth and simply take a new loan against the current value to help fund another purchase. Just because you haven’t sold your home, doesn’t mean it hasn’t gone up in value. Using home equity to invest in property is about leveraging the equity you already have created on paper, rather than selling.
What if I don’t have 50% equity?
You don’t need exactly 50%. We’ve just used this as an example. Even with less equity, there may be options to access part of it, depending on your income, lender and overall financial position.
Will this affect my repayments?
Yes. With a new loan, you are ultimately responsible for servicing that loan. Budgeting, planning ahead and a cash buffer are critical here. However keep in mind that if you buy investment property, you aren’t the only one contributing to the loan. Rental income significantly contributes to loan repayments too. Plus, when you have an investment property, you might also be able to claim a string of tax deductions. However it’s certainly best to map this out with your accountant before diving in.
Do I need to cross the property loans together?
No, we don’t believe in cross securitisation. A preferred method is to borrow the equity as cash against your home, then use that as your cash deposit for the investment property (plus purchase costs, cash buffer, etc).
Equity Access vs Home Value (Sample Table)
Let’s assume you have 50% equity in your home and can borrow 80% of the equity available. Here’s a rough guide of the equity you might be able to access.
Home Value | Existing Loan | Total Equity | Borrowing Limit (80%) | Usable Equity |
---|---|---|---|---|
$800,000 | $400,000 | $400,000 | $640,000 | $240,000 |
$1,000,000 | $500,000 | $500,000 | $800,000 | $300,000 |
$1,200,000 | $600,000 | $600,000 | $960,000 | $360,000 |
Using Home Equity to Invest in Property Isn’t For Everyone
This approach might suit:
- Homeowners with growing equity
- People who want to build wealth through property
- Investors comfortable with managing multiple loans
- Anyone serious about getting their money working harder
This approach is not for:
- Homeowners with little or no equity
- People already struggling with mortgage repayments
- Anyone without a stable income
- Those who are close to retirement
- People looking for quick returns or short term gains
The First Step is to Understand Your Own Numbers
If the jargon is confusing, or you don’t really understand the examples we’ve shown on using home equity to invest in property, you can reach out and we’ll walk you through how this process might look for you and your family.
Your absolute first step, whether this is something you are interested in or not…
📞 Call us on 02 9194 2260 for a complimentary home valuation to find out how much equity you might have.