If you already own a home, you may have built up equity that could potentially help fund another property purchase. However, accessing equity involves additional borrowing, so it’s important to understand how much may be available and whether the repayments fit your budget.
What Is Home Equity?
Home equity is the difference between your property’s current market value and the amount you still owe on your mortgage.
For example, if your home is worth $900,000 and your outstanding home loan is $500,000, you have approximately $400,000 in equity.
However, this doesn’t mean you can automatically access the entire amount.
The portion potentially available for additional borrowing is commonly referred to as usable equity.
How Much Equity Can You Access?
The amount of usable equity depends on your property’s assessed value, existing mortgage and lending requirements.
For illustration, let’s assume additional borrowing is permitted up to 80% of your property’s value.
Using the previous example:
- Property value: $900,000
- 80% of property value: $720,000
- Existing mortgage: $500,000
- Potential usable equity: $220,000
This suggests there may be up to $220,000 in usable equity under the assumed lending limit.
However, the amount actually available depends on your financial circumstances and approval of additional borrowing.
How Can Equity Help Purchase an Investment Property?
One common approach is to use accessible equity from your existing home towards the deposit and purchasing costs of another property.
You may then arrange a separate investment property loan to fund the remaining purchase price.
This can potentially reduce the amount of cash savings required upfront.
However, it’s important to remember that accessing equity means borrowing more money, rather than withdrawing savings.
Your overall debt and repayment obligations will increase.
Do You Need to Refinance Your Mortgage?
Not necessarily.
Depending on your circumstances, accessing equity may involve increasing your existing home loan, establishing a separate loan split or refinancing your mortgage.
A loan split allows different portions of borrowing to be managed separately, which may be useful when distinguishing investment-related debt from personal home loan debt.
Before changing your loan arrangements, consider any applicable fees, repayment changes and loan features.
Why Borrowing Capacity Matters
Having substantial equity doesn’t automatically mean you’ll qualify for another property loan.
Your borrowing capacity depends on your income, existing debts, household expenses and ability to manage additional repayments.
Expected rental income from an investment property may also be considered, although it may not be counted in full.
Understanding both your usable equity and borrowing capacity is an important first step.
What Are the Risks?
Using home equity to invest can create opportunities, but it also increases your financial commitments.
Potential risks include higher repayments, changes in property values, rental vacancies and unexpected property expenses.
If your existing home is used as security for additional borrowing, it may also be at risk if you cannot meet your loan obligations.
It’s important to consider whether the additional debt remains manageable if your circumstances change.
Understand Your Property Finance Options
If you’ve owned your home for several years, you may have more equity than you realise.
We can help you review your existing mortgage, explore potential equity arrangements and understand the finance requirements for purchasing another property.
Considering using your home equity to purchase an investment property? Get in touch today to learn more about your options, discuss your borrowing position and request a no-obligation quote.
