How to Use Equity to Buy a Second Property

How long have you owned your house? If you’ve been repaying your mortgage for several years, you’re likely sitting on an asset that could help you build wealth. Many homeowners aren’t aware they can leverage the equity in their house to kickstart or grow a property investment portfolio. It often remains untapped due to a lack of understanding about accessing and utilising it effectively. So, that’s what we’ll tackle today. You can use equity to buy another property—ideally an investment property— but it requires meticulous planning, so we’ll go through the details below. 

Equity in Property: What Is It and How Can You Calculate It?

Equity is essentially the difference between your house’s current market value and the outstanding balance on your mortgage. Say your home is valued at $800,000, and you owe $400,000 on your mortgage, then you have $400,000 in equity. But here’s the kicker: not all of this equity is useable. Banks and lenders typically require you to maintain a certain loan-to-value ratio (LTV), often around 80%, to ensure they have sufficient security. So, you might only access up to 80% of your property’s value, leaving some equity untouched. Using the same example, let’s take 80% of $800,000, and that will be  $640,000. Now, when you minus the amount you owe on your mortgage, you’ll see that you have $240,000 as your usable equity. You can leverage that as a deposit or additional fund to buy an investment property. 

How to Access Usable Equity to Buy an Investment Property

You have two options if you want to access equity in Australia: the first one is refinancing your mortgage, and the other is topping it up. Refinancing involves replacing your current loan with a new one that allows you to borrow more money against your property’s increased value. It is a suitable option if you’re looking to switch to a more favourable interest rate while getting the funds to buy another house to put up for rent. On the other hand, topping up your loan involves borrowing additional funds against your existing mortgage without changing the loan terms. 

Both options require a thorough assessment of your financial situation, including income, debts, and credit history—and that’s where experts can be of great help. You can work directly with a mortgage broker. Engaging a buyer’s agent is a good option, too. For instance, here at U Buyers Agents, we will guide you throughout the process of buying another property and connect you with well-vetted mortgage brokers who can find the refinancing loans and other products that suit you best. 

Using Equity to Buy Another Property: A Sample Scenario

Let’s paint a picture to help you get a better grasp of this wealth-building strategy. 

Suppose you have $200,000 in useable equity from your primary residence. You could use this as a deposit for a second property, potentially securing a loan for the remaining amount needed to purchase the property. For instance, if you’re buying a $600,000 investment property, you might use your $200,000 equity as a deposit and borrow $400,000. This way, you can invest without tying up too much cash.

What to Consider Before Using Equity to Buy an Investment Property

As with any investment decision, you must consider your long-term financial goals and current market conditions. Get a solid understanding of the property market in the area you’re investing in, as well as potential rental yields and capital growth prospects. If you’re too busy at work or overwhelmed by too much information, you can rely on a seasoned buyer’s agent like us to get all those details and insights on your behalf. 

Choosing the right loan type matters, too. If you’re buying an investment property using your equity, consider refinancing your mortgage with interest-only loans. They may help lower your monthly repayments, which can help you maximise your cash flow as an investor who needs to deal with property repair and maintenance costs and occasional vacancies. However, it’s essential to weigh this benefit against the potential for increased principal repayments down the line. 

Tax implications are also important to consider. In Australia, you may claim deductions on interest payments and other expenses related to your investment property against your rental income. However, it’s always wise to have a meeting with a tax professional to understand how these rules apply to your specific situation.

Final Thoughts 

Using equity to buy another property can be strategic. It allows you to tap into the wealth you’ve built in your current property to secure another asset without needing a large cash deposit. However, it’s vital to approach this decision with careful planning and a thorough understanding of the financial implications. With expert help, you can leverage your equity wisely and weigh all the pros and cons to build or expand your property portfolio and generate wealth over time.