Equity to Invest

What is Home Equity? 

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

Think of equity as the money you’d pocket if you sold your house right now—minus what you still owe the bank. Basically, it’s the portion of your home you’ve paid off, from both the initial deposit and via your mortgage repayments.  For instance, let’s say that your home is valued at $900k and you only have $350k left to pay on your home loan. Boom! You’re sitting on $550k of equity gold. Simple. 

The best part is that your equity grows over time. Every month you pay down both your principal and interest, or the property value goes up, your equity grows and grows!  

What is my usable equity? 

Usable equity is pretty much what it sounds like. It’s the amount of equity in your home that you can actually use or access. Lenders play the game a little safe here and will usually only permit 80% of your home’s value minus what you still owe to be unlocked as equity. 

So, why not the full 100%? Well, lenders are like financial guardians. They want to avoid a scenario where your loan surpasses the value of your property, especially if the real estate market decides to do a nosedive.  

To work out your usable equity, you simply subtract 80% of your property’s current value from what’s left on your mortgage. For example, let’s say your humble abode is valued at $600,000, and you still owe $200,000 on your mortgage. Crunch the numbers – $600,000 times 0.8 equals $480,000. Minus the $200,000 you still owe, and voila! Your usable equity is a sweet $280,000. 

Just remember, this isn’t a one-size-fits-all rule. Your lender might also wish to conduct a formal bank valuation to understand the real deal on your home’s value and calculate the exact usable equity.  

How do I access my home equity for an investment property? 

You have a few options when it comes to using the equity in your home as a golden ticket for an investment property: 

An Equity Loan  

With an equity loan, you’re borrowing against the equity in your property to get the funds for a new investment property. Instead of requiring a cash deposit, you can use the equity as a deposit for an additional property. 

Refinancing to Release Equity 

Refinancing is basically replacing your current loan with a new one, and in the process, you can release some equity. It’s a two-in-one that may get you a better deal on your existing home loan while unlocking funds for your investment venture. 

Cross Collateralisation

With cross-collateralisation, you’re using your existing property to get a loan for your new investment property. It’s like bundling up both properties into one loan package. Your original property and the new investment property become partners in crime, securing the loan. But beware, separating them down the line can be a bit more complicated if you decide to sell one.

Helpful tip:

Each different way of using your home’s equity has its own steps and quirks, and this is just general information, not a recommendation. Make sure you’re well-versed in the terms and conditions or speak with a financial planner to understand which option may be best for your situation.

Debbie Shankar

Former Group Content Manager, Lendi

What are the pros and cons of using home equity to buy an investment property?

• You can dive into the investment property world without bedding to save up for a new deposit
• You could lease out your new investment property and use it to bring in rental income. 

• It usually increases the debt on your existing home loan, which can be an extra strain on your finances.
• The increased debt on your home loan means your repayments will probably go up—and that’s more cash out of your pocket. 

Should I use my home equity to buy an investment property? 

Ah, the age-old question: should you dip into your home equity to snag an investment property? There’s no one-size-fits-all answer here. Rather, it’s a matter of doing your research and thinking carefully before you make the decision. The following strategies can help you here: 

• Before you take the plunge, do a deep dive into your own financial pool. Assess, analyse, and make sure you’re not diving into the deep end without floaties.
• Knowledge is your best friend. Research the local property market like you’re on a mission. Know the rental demand, property price trends, etc.
• Map out your cash flow – potential rental income, monthly expenses (strata, council fees, maintenance, and those loan repayments).
• Before you commit, give the property a once-over. Check its age, condition, and any extra frills like pools and gardens that might require a lot of upkeep. You don’t want surprises that drain your wallet post-purchase.
• Channel your inner tenant. What’s the market looking for? If you can picture yourself happily renting the place, you may be on the right track. 

How else can I use my home equity for investing? 

If you’re wondering how else this equity powerhouse can work for you and aren’t super keen on investment property, here are some other options to consider: 

• Renovate like a boss: Your equity can be your renovation buddy. Need an extra bedroom for the little one on the way? Equity to the rescue.
• Diversify your assets: Eyeing the stock market? Your equity can be used for bonds, shares or to join the managed funds party.
• Wealth creation magic: Pop your equity into your super for some retirement wealth creation, growing your financial garden in different ways! 

Remember, before you start throwing your equity into the financial ring, have a talk with your financial adviser. They’re the ones who can tailor the strategy to your risk tolerance, goals, and dreams.  

Where can I find and compare Home Loans? 

iSelect and Lendi have teamed up to make your home loan journey a breeze. You can compare a whole stack of home loans from over 25 Aussie lenders online.