Using your home equity to fund an investment property
Depending on how long you’ve owned your home, you may be sitting on a pot of gold when it comes to the amount of home equity—the difference between your property’s value and the amount still owed on its mortgage—that you could access.
Over the 30 years from 1992 to 2022, Australian house values increased by 382%, or by an annual compounding average of 5.4%. That means if you bought a house in 1992 for $500,000, that same property would today be worth $2,410,000.
And it’s not just those who signed a contract in the ‘90s who have profited. Prices went up by 40-50% in Sydney, Melbourne, Brisbane and Adelaide over the last 10 years, and 13.23% in Perth, delivering significant equity gains for many homeowners across the country.
For owners looking for ways to leverage these gains to potentially create wealth in the future, here are our tips on using your home equity to fund an investment property, along with some key considerations when doing so.
How to build equity
Reduce your debt
Building equity is about increasing the gap between what you owe and the value of your home, so be sure to explore ways to pay off your loan sooner – a good place to start is the moneysmart website which features tips and advice.
It’s also a good idea to monitor your local property market to stay abreast of changes in your property’s value, comparing this to your loan balance to track your growing (hopefully) equity over time.
Hold onto your property for longer
Equity tends to build over time, as you continue paying off your loan and as your property value increases. Although the current rate of property price growth may be slowing in some areas following the record highs seen in recent years, generally speaking, there are usually equity gains to be made with each passing year of homeownership.
Increase the value of your home
Undertaking renovations could boost the value of your home and therefore increase your equity. If you would like advice on how you can improve the value of your home, speak to your local Hockingstuart agent.
Calculate and access your equity
Calculate available equity
Work out the amount of equity available in your property using the estimated market value of your home minus the balance of any loans for property. For example, if your home is worth $800,000 and you owe $450,000, your equity is $350,000. The estimated market value of your home can be determined by comparing recent nearby sales on domain.com.au or by getting a property appraisal. Your local Hockingstuart office can provide you with a free estimate – get in touch.
Calculate useable equity
Lenders will typically offer 80 per cent of the value of your home – less the debt you still owe against it. This is considered your useable equity. For example, 80 per cent of $800,000 (property value) equals $640,000, minus $450,000 (owing on loan) equals $190,000. You may be able to use this $190,000 as a deposit for an equity loan.
Review loan options
Start researching and assessing your home loan options. Do a health check on your current loan, comparing interest rates, fees and features with other lenders. A home equity loan allows homeowners to borrow money against their home equity via several options, including a line of credit, a redraw facility on a variable rate mortgage, or by refinancing a mortgage.
If you have owned the property for a few years and are consistent with paying your mortgage on time, you may also be able to refinance this loan at a lower rate – check with your lender.
Calculate costs for accessing equity
The option you choose and the amount of equity you access may result in fees and expenses. Keep in mind Lender’s Mortgage Insurance (LMI), and remember that there may be associated fees if you decide to switch lenders. If the usable equity is not enough to cover the entire deposit, stamp duty and settlement costs, you will have to make a cash contribution.
Things to consider
Even if you have significant equity, it is not always guaranteed that you can borrow against it. Much like applying for a home loan, lenders will also consider several factors such as income, age, dependents, and any additional debts.
The property from which you are taking equity will become additional security for your new loan. This means any decisions you make to one loan or property may impact the other.
Before using your home equity to fund an investment property, like with any other major investment it is recommended that you speak to a professional for advice tailored to your specific circumstances.