Leveraging equity in your home could hold the key to building wealth through an investment property.
Property is one of Australia’s favourite investments – and with good reason. Residential property has the potential to deliver healthy capital growth for investors.
Add in rental income that can help pay off the investment loan and potential tax savings through negative gearing, and it’s easy to see why over 2.2 million Australians own at least one rental property (ATO).
What’s less well-known, is that homeowners don’t always need a significant deposit to buy an investment property.
If you’re a homeowner, you may be able to use home equity in lieu of cash savings as a deposit on a rental property. Here we explore how to leverage equity for an investment property.
What is home equity?
Home equity simply means the difference between your home’s market value and the balance owing on your home loan.
As a guide, if your home is currently worth $600,000, and you have $250,000 remaining on the mortgage, you have home equity valued at $350,000.
That’s a significant financial resource, and the good news is that you don’t have to sell your home to put home equity to work.
Leveraging equity to invest
So, how does using equity to invest work in practice?
In most cases, banks will lend up to 80% of the value of your home minus the balance of your home loan. It may be possible to borrow more, but above the 80% benchmark you’ll be asked to pay Lender’s Mortgage Insurance, which can be a significant added cost.
An example here will help to show how banks determine the value of ‘lending equity’.
Let’s say Sue owns a home valued at $500,000. She’s owned the place for about 10 years, and her mortgage is down to $175,000.
A lender will determine Sue’s lending equity based on 80% of her home’s value less her remaining home loan debt.
For Sue, this works out to be:
- 80% of $500,000 (her home’s current value) = $400,000
- $400,000 minus $175,000 (Sue’s home loan) = $225,000
This $225,000 acts as a tidy sum to pay a deposit on an investment property. From there, Sue can source another loan for the remaining balance of the purchase price.
Not only is Sue getting more value from her home equity, she is also able to preserve cash savings.
