Accessing your home’s equity to purchase an investment property

Equity is the difference between the value of your property and the amount you still owe on your home loan. Home equity can be a valuable resource when it comes to growing your wealth.  

While there are many ways you can use the equity in your home – such as renovating or paying for a holiday – one of the most common uses is to purchase an investment property. The process might be simpler than you think.  

Here are five steps for unlocking equity to buy an investment property.   

Step 1: Estimate how much your property is worth 

If you’ve owned your home for a while, its market value has most likely increased since you bought it. You can use comparable sales in your area, a real estate agent valuation or a free PropTrack property report from your Mortgage Choice broker to come up with an estimate for the current market value for your property.   

Step 2: Calculate your accessible equity 

Once you’ve worked out how much your home is worth, subtract the current balance of your mortgage. The difference between these two figures is the amount of equity you have. 

For example, if you estimate that your property is currently worth $1.1 million and the balance of your mortgage is $400,000, then you have $700,000 equity in your property. 

However, your accessible equity will likely be less than this. When looking to purchase a property using equity, lenders will generally allow you to borrow up to 80% of your property's value. This typically means you can’t access your entire equity amount. 

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. 

For example, 80% of the estimated market value of $1.1 million is $880,000. After we minus the $400,000 mortgage balance, it amounts to $480,000 in accessible equity. This is the maximum amount of equity you can use towards purchasing an investment property without being charged LMI. 

Step 3: Work out your servicing capability 

Even if you’ve built up a large amount of accessible equity in your property, it’s important to consider your ability to repay a higher amount of debt. If you refinance your mortgage so you can use some of the equity in your property, your monthly repayment amount will increase. Make sure you can comfortably meet these repayments as well as your living costs.  

Your Mortgage Choice broker can help you determine how much money you need to achieve your goals and whether it will be possible to meet the higher repayment amount based on your current income. 

Step 4: Review your loan options and refinancing costs 

Once you’ve determined that you can comfortably service a higher mortgage on your home, as well as an investment loan, it’s time to explore your loan options. 

An important factor to consider is that while the interest rate on an investment loan will generally be higher than an owner-occupied loan, you can claim the mortgage interest for your investment property as a tax deduction. You may also be able to claim management costs like property agent and strata fees, land tax and maintenance costs. You can’t do this for a home that you live in, which is why the loan on your home will usually cost you much more on an ongoing basis than the loan on your investment property. Reach out to your accountant for more information on claim eligibility.  

Taking this into account, your Mortgage Choice broker can help you work out the optimal amount of equity to draw from your current home, with the remaining purchase amount as an investment loan.  

This may also be an opportunity to assess your current home loan to see if you can find a product with a lower interest rate or better features. Your mortgage broker can also take you through any fees and costs associated with refinancing. For example, if you decide to switch to another lender there may be fees associated with breaking from a fixed rate product, a new loan application fee or government fees. 

Step 5: Loan application and settlement 

Once you've chosen your loan options and found the right investment property, your Mortgage Choice broker will work with you to get the application process underway.  From doing all the research, submitting the paperwork and negotiating with lenders on your behalf, they’ll support you at every step to settlement and beyond, as you build your property investment portfolio.