We're not saying that buying a second home or an investment property is easy. It can be incredibly tricky, especially if you don’t know where to start. One of the most common techniques savvy investors use when buying an investment property is utilising something called home equity.

Home equity: the difference between the current value of your property (not the price you paid for when you bought it) and the amount that you still owe on the mortgage.

For example, if your property is valued at $500,000, and your remaining mortgage is $300,000, you have $200,000 in equity.

The equity you have in your existing home can be used as security with banks and lenders. That means you might be able borrow against your equity to purchase a variety of things – including renovations, a new car, a holiday, or as this article will cover – an investment property. Learn how you can turn the home equity on your existing property into a second property.


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Where does equity come from?

When you make your regular principal and interest repayments on your mortgage, your equity is growing. The lower your home loan goes, the more equity you create.
 
The other way equity can increase is through capital growth.

Capital growth: Also known as capital appreciation, capital growth is the increase of an investment over time. It is measured by comparing the price you paid for the asset, and the price it is currently valued.

For example, if you bought your home for $500,000, and it's now worth $600,000, you've gained $100,000 in equity due to capital growth.

Of course, relying on capital growth always has risks – especially with fluctuations in the property market.


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Total equity vs. usable equity

As a rule, banks and lenders will only let you access 80% of the value of your home, minus the debt that you still owe. This is known as 'usable equity' and will differ from the total equity you own.
This might be a little confusing, so let's see it in action.
 

Your property value = $500,000
80% of your property value = $400,000
Minus your mortgage = $300,000
Usable equity = $100,000

 
If you want to access more than 80% of your usable equity, your bank or lender might let you – but if they do, you'll likely need to take out Lenders Mortgage Insurance (LMI). LMI can cost you thousands of dollars depending on the loan amount, so it’s worth considering if this is the right path for you.

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How to work out your current property value

To work out the equity you have on your current home, you'll need to organise a property valuation. The valuation will detail the market value of your existing property, and in turn, help you find out your usable equity. There are plenty of organisations through which you can get your property valued – including banks, lenders and independent, certified valuers.

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What else will banks consider?

Even if you have plenty of equity, your bank or lender will not always let you borrow against it. As with all loans, your lender will also take the following into consideration:

  • Your income
  • Your age
  • Existing debts
  • Your marital status
  • Number of dependants
  • Your credit rating
  • Your ability to service increased debt

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Tips for using your equity

  • The rule of thumb with all investments, is don't put all your eggs in one basket. It's essential to keep some spare money aside as a buffer. If there's an emergency (we can't predict those!), you'll have some cash to spare. Always play it safe!
  • Repay as much of your own home loan as you can before focusing on property investment. Remember, the more you pay off, the more equity you'll have available.
  • Research the best areas to buy investment properties. There are plenty of articles online you can read, as well as experts who can help you research property market growth areas. Even ask your real estate agent friend if you trust their advice.

A graphic depicting a target with an arrow in the bullseye, as well as paperwork, charts and graphs.

Engage with the pros

Most important of all, utilise the knowledge of professionals to make sure you fully understand your options. Financial advisers and mortgage brokers will help you get your head around how much equity you have, how much you can access and even if an investment property is viable for you in your current situation. Make sure whoever you engage with has the appropriate licences - such as an Australian Credit Licence or an Australian Financial Services Licence (AFSL).
 
So, if you're looking to build your property portfolio by buying a second property, why not speak to a professional who can help you work out your available equity. If you have enough equity, and your financial adviser thinks an investment property is a good idea based on your financial situation, start browsing our range of affordable homes today. 
 
Read how other property investors built new homes with Metricon here.
 
*While we've tried to be as helpful as possible, this article should not be taken as professional financial advice. It contains general information only, and you should seek out independent, professional advice before making any financial decisions.