Using home equity to purchase an investment property

Kieran and Amelia are a couple in their late forties with two teenage children. Eight years ago they bought their four-bedroom family home on the Central Coast, about an hour north of Sydney, for $575,000. After checking comparable sales in the area and asking their Mortgage Choice broker for a free PropTrack property report, Kieran and Amelia estimate that their house is currently worth $980,000. 

Because their home has appreciated in value, Kieran and Amelia are keen to use some of their home equity to purchase an investment property. 

Finding the right investment opportunity 

Kieran and Amelia’s neighbourhood has seen a lot of development over the past few years. There are a lot of new houses and apartment blocks being built to accommodate people who are moving into the area.  

There’s a block of units nearby with a two-bedroom apartment that Kieran and Amelia believe would make a great investment property. It’s close to the beach, shops, cafes and restaurants. The apartment is estimated to sell for around $650,000. 

Doing the sums 

Kieran and Amelia’s mortgage balance is currently $360,000.  

After speaking with their mortgage broker, Kieran and Amelia realise they have $424,000 in accessible equity in their family home. This is calculated as 80% of $980,000 (the current value of their home) minus the $360,000 still owing on their mortgage.  

Why 80%? 

When looking to purchase a property using equity, lenders will generally allow you to borrow up to 80% of your property's value.  

While it may be possible in some circumstances to go above the 80% mark, keep in mind that you will likely be charged Lender's Mortgage Insurance (LMI) - even if you paid LMI when you took out your original mortgage. 

Kieran and Amelia decide to refinance their home and increase their mortgage from $360,000 to $515,000. By doing this, they will have a 20% deposit for the investment property ($130,000) plus an additional $25,000 to cover purchase costs such as legal fees and stamp duty. After calculating their servicing capability with their broker, Kieran and Amelia are confident that they will be able to comfortably afford the higher mortgage repayments on the $515,000 mortgage.  

Making an offer 

Kieran and Amelia’s offer of $650,000 for the apartment is accepted. They pay their 20% deposit and additional $25,000 to cover the purchase costs. Then they take out an investment loan of $520,000 for the remaining 80%.  

Shortly after settlement, Kieran and Amelia find a tenant for the apartment. The rent covers the monthly repayments for their investment loan, as well as a portion of their ongoing property management expenses, which include strata fees, agent costs, landlord insurance, repairs and maintenance.  

Generating wealth 

Over the following years, Kieran and Amelia’s apartment continues to provide them with a steady stream of income in the form of rental payments. While they have ongoing costs to manage the property, many of these expenses are tax deductible. The property also appreciates in value, which means Kieran and Amelia are generating wealth for their family and their future.