Buying a second property with equity

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Last Updated 09/10/2024
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Written by

Tina Sendin

Last Updated 09/10/2024

What changed?

Added sections, examples, internal and external links. Updated sourcing and referencing
Our aim is to help you make better informed decisions. That’s why iSelect’s content is produced in accordance with our fact-checking and editorial guidelines.

Edited by

Ellie Garran

Reviewed by

Debbie Shankar

Find out more about how we make money.

View our Privacy Policy.

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What is home equity? 

Equity is the portion of your home’s value that you own. It’s the difference between the current market value of your property and your remaining home loan balance. 

How do I find out how much equity I have? 

If you subtract the amount owing on your mortgage from the current value of your home, that figure gives you the amount of equity you have in your home. 

Equity = current market value of your home – remaining loan balance  

For example, if your home is valued at $600,000 but you still have $200,000 left to pay on your loan, your equity is $400,000. 

What is usable equity? 

As the name suggests, usable equity is the equity in your home that you can actually access and borrow against. You can work out the usable equity available by calculating 80% of your property’s current value and subtracting what is still owing on the mortgage. 

Useable equity = 80% of current market value of your home – remaining loan balance

For example, if your home is valued at $400,000 and you have $100,000 owing on your mortgage, you can work out the usable equity with this equation: $400,000 x 0.8 = $320,000 – $100,000 in existing loans= $220,000. 

How do I build up equity? 

There are many ways your equity can grow over the years.  

  • You pay off your mortgage. As long as your property value isn’t declining, every mortgage payment you make generally increases your equity. Equity grows even more when you increase your home loan repayments – either in frequency or amount.  
  • You improve your home. When you embark on that bathroom reno project or paint your discoloured fence into modern off-white, your property’s value increases. Therefore, so does your equity.
  • Property values increase. Equity changes with the property market. When there are new shops around the block, your property’s area might increase in value. And with it, your equity. 

How can you use your equity? 

When you find that you have built a decent amount of equity, you can use it in different ways: 

  • take the big leap and grow that side hustle into a full-time ecommerce business
  • indulge in a boat or a dream car
  • go on an overseas holiday
  • decrease your monthly repayments through debt consolidation
  • purchase a second property

But keep in mind that equity isn’t free money, as nice as that would be. First, your lender has to approve your equity release. And then, once you take the plunge, any equity you access will increase the amount owing on your home loan. 

How does equity work when buying a second home? 

Perhaps you’re expecting a bub for the first time, getting a playful kelpie that needs a dog park close to home, or wanting to be closer to the urban hustle and bustle. All these are legit reasons to buy a second property! 

But if you don’t have enough cash for a deposit, you can tap into your first property’s usable equity. Most lenders can lend as much as 80% of your current property’s value, minus how much you owe them. 

If you’re wondering how this whole thing works, here’s an example scenario: 

  • In 2019, Marcus purchased his first property, a two-bedroom unit, for $470,000. Soon after, he met Cecilia.
  • Over the next five years, they lived the ultimate DINK (double income, no kid) life. They went on yearly overseas trips. They got engaged and recently got married.
  • Fast forward to now, they’re expecting their first bub. Marcus and Cecilia find themselves needing a bigger place that’s closer to highly rated childcare centres and schools.
  • When Marcus bought the unit, he paid a deposit of $94,000. Then, over the next five years, he repaid an additional $75,000.
  • Marcus still owes $301,000. But his property value has increased to $600,000. That means he has $299,000 in equity.
  • His useable equity (80% of his property value, minus what he still owes) is $179,000.
  • With their current financial status, Marcus and Cecilia are able to refinance the unit’s home loan, tap into its equity, take out a new loan, and purchase a three-bedroom house with a small backyard for $500,000. 

Here’s how it looks: 

How can I use equity to buy an investment property? 

There are a few ways you could leverage your usable equity to get the keys to a second home.  

Home loan top up  

You can apply for an increase in your home loan limit. This extra amount gets added into your account as cash, which you can use to buy another property.  

Your total loan increases and so do your extra repayments – which all need to be paid within the original loan term. So if you go this route, it’s a very good idea to make sure your finances are solid. 

Cross-collateralisation 

With cross-collateralisation, you can purchase a second property and have your original lender finance the entire purchase price alongside other costs, like stamp duty.  

So how does it work? Your loan uses the two properties as collateral for each other. That could be more convenient in some ways, but potentially not in others.  

Keep in mind that if you find yourself wanting to sell one of your properties in the future, your bank will need to go through a new valuation for the property. And if the figure is lower, you’ll owe the bank more money. 

Supplementary loan  

You can use your equity to get a supplementary loan from the same lender as your existing loan. This separate account doesn’t increase the balance on your current home loan. It also means you have the flexibility to choose a home loan with different features from your existing one. 

With this new account, you can choose the repayment frequency and interest rate type (fixed, variable, or hybrid) that works best for you. You can also extend the loan term if you need a bit more wiggle room.  

Line of credit 

A line of credit combines your home loan and day-to-day expenses in one handy account. Each month, interest is added to the loan. As long as you stay within the credit limit, there’s no pressure for repayments. With a line of credit, you can tap into your home equity without the hassle of a new loan application. 

It’s like having a reliable safety net that lets you borrow up to a certain limit, pay it back, and then dip into it again whenever you need. 

How are Aussie homeowners buying second properties with equity? 

Here’s how different types of (fictional) investors might use equity to buy a second property and play it to their advantage. 

Meet Rob, a conservative saver topping up his current home loan to buy an investment property

Rob has a low risk tolerance and prefers stable, long-term investments. He wants to build wealth gradually and minimise exposure to financial risks.

Rob uses his house’s equity to buy a second property. He prefers those in well-established neighbourhoods with a history of steady appreciation. In fact, he prioritises properties that are low-maintenance and have the potential for reliable rental income.

As a conservative saver, his primary goal is to secure a stable investment that can provide a consistent, passive income stream (through rentals) over time.

Rob thinks this is the perfect time to get an investment property and decides to talk to his lender about a home loan top up.  Because he’s built substantial usable equity from his house over the years, he’s able to increase his home loan and use the top-up funds to get a second property.

With a top up, he can manage his home loans more easily as there’s only one credit account with a single interest rate (which is lower than when taking out a separate loan).

Meet Moya, a savvy investor getting a second home without a deposit, thanks to cross-collateralisation

Moya has a high risk tolerance and a keen interest in maximising returns. The savvy investor in her wants to use her equity to purchase properties in up-and-coming (or growth) areas. She’s looking at renovating a derelict 1960s house to give it a modern minimalist interior design with an open layout.

While Moya hasn’t saved enough for a deposit on her second property, she’s estimated how much equity and borrowing power she might have. She’s also consulted a broker, who’s given her a rosy assessment of her financial health and capacity to take on a second mortgage.

So she talks about cross-collateralisation with her lender. Here’s how it works:

For the past 10 years, Moya has owned a property, which she purchased at $600K and is now valued at $1 million. With her monthly repayments and property appreciation, she’s built up almost $600K in useable equity.

Now, she has her sights on a suburban home currently valued at $800,000.

With cross-collateralisation, Moya’s bank now holds a total of two properties worth $1.8 million as collateral for each other. Because of her solid equity, Moya can cover her second property’s value, renovation costs, and stamp duty.

With this method, Moya may get good interest rates from her current lender. But if she wants to sell her first property down the line, her bank will need to come up with a new valuation. If the new property value is lower, Moya might end up losing money.

What are the benefits of using equity to buy a second property? 

Simple application. If you have enough equity in your home and have a history of being a responsible borrower, getting approved for a loan could be straightforward. 

Buy another property more quickly. You don’t have to wait a long time to get your second property. Accessing your equity – when you have it – could be faster than saving for a deposit. And you can get the property before house prices soar to levels your savings won’t be able to reach. 

What’s the risk of using equity to buy a second property? 

  • Fees. There are common fees associated with refinancing your home loan that can sometimes be negotiable. A mortgage broker could help.  that can sometimes be negotiable. A mortgage broker could help.  
  • You will have less home equity. Yep, and you’ll have more debt. So, as with any loan, make sure that you can afford to take on the extra burden. 
  • Lenders mortgage insurance (LMI). If you borrow more than 80% of your equity, then you’ll generally be required to pay LMI. 

Quick Tip:

Thinking of using equity to purchase an investment property? Have a good think about your risk tolerance, current investment strategies, and lifestyle preferences. Consult a financial advisor or mortgage broker to determine an investment strategy that fits your style and financial situation. Explore all your options to make sure you’re making an informed decision that matches your current and future financial standing.

Debbie Shankar

Former Group Content Manager, Lendi

How will I know if using equity to buy is a good idea? 

Using equity to buy a second property can be a smart financial move for some people, but it’s not always the best option. Here are some factors to consider before tapping into your equity: 

  • Your current financial situation: Can you afford a second property? Are you able to comfortably afford another mortgage payment on top of your existing one?
  • The current property market: Is it a good time to invest in another property? Will the area you’re looking at continue to increase in value?
  • Your long-term goals and plans: Do you plan on living in the second property or is it strictly for investment purposes? How will this purchase align with your overall financial goals?
  • The potential risks: What happens if your property’s value decreases, or you find yourself in a curly financial situation? Do you have a backup plan in place?  

If you want to dive even deeper into your decision making, consider doing an equity health check. 

 Equity health check  
Signs a home equity loan might work for you   Signs a home equity loan might not be right 
Low loan-to-value ratio (LVR)

This is the percentage of your property’s value that’s financed through a mortgage. The lower your LVR is, the better; most lenders prefer less than 80%.  
High debt-to-income ratio

If you already have a high amount of debt compared to your income, adding another mortgage payment might not be financially feasible.  
Stable or appreciating property market

Before using your equity to buy another property, consider whether the property market in the area you’re looking at is stable or increasing in value.   
High interest rate environment

If interest rates are high, it might not be a good time to take out another loan. This could mean higher monthly payments and increased financial risk.  
Financial safety net

Do you have sufficient emergency funds or personal savings in case things go haywire? Are you paying insurance for your properties?  
Market downturn

If the housing market in your area is on a downward trend, it might result in you losing money on your investment or being unable to sell if needed.  

I’m considering buying a second property with my equity. Where do I start? 

iSelect and Lendi have joined forces to help you in refinancing your home loan and unlocking that dream second property. Get the ball rolling and compare from over 25 lenders online.  

Get started on comparing home loans today!

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iSelect is the trading name of iSelect Mortgages Pty Ltd (ABN 86 148 217 181). iSelect Mortgages Pty Ltd is a credit representative (Credit Representative 400540) of Lendi Group Distribution Pty Ltd (Australian Credit Licence 246786). iSelect provides a referral to Lendi Pty Ltd, a Credit Representative of Lendi Group Distribution Pty Ltd (Australian Credit License 246786). iSelect Mortgages Pty Ltd receives a commission from Lendi Group Distribution Pty Ltd, the licensee for each new customer account created and for each home loan submitted through this service.