How to Use Equity to Buy Property

Home equity represents the difference between your property’s current market value and what you owe on your mortgage. In Australia, leveraging this equity can be a powerful way to invest in additional properties without needing a substantial cash deposit. By using the value you’ve built in your existing home, you can create a pathway to grow your property portfolio, build wealth, and generate future income. However, it’s essential to understand how the process works and the risks involved to make informed and financially sound decisions.

What is Home Equity?

Equity is the portion of your property that you own outright, calculated by subtracting the outstanding loan balance from the property’s market value. As you pay down your mortgage and your property appreciates, your equity grows, providing a valuable asset. This equity can be viewed as a financial resource that allows homeowners to access funds without needing to sell their property. In Australia, equity is increasingly used as a tool to invest in property, allowing homeowners to use their existing property as a springboard for wealth generation.

Equity growth happens over time as property values increase and as you make mortgage repayments, reducing the amount owed on your loan. This means that maintaining regular mortgage payments and keeping track of property values are critical steps in building equity. For Australian homeowners, this growth in equity opens up the possibility of using it as security for purchasing another property. Equity is particularly valuable in a rising property market, where appreciation can significantly boost your financial capacity.

How to Calculate How Much Equity You Have?

Calculating your available equity starts with determining your property’s current market value, which may involve getting a professional appraisal or using recent sales data in your area as a guide. From this value, you subtract the amount still owing on your mortgage to determine your equity. For example, if your home is valued at $1,000,000 and your remaining mortgage balance is $600,000, your equity would be $400,000.

However, not all of this equity can be accessed; generally, lenders allow you to borrow up to 80% LVR (read more here). It is a good idea to speak to an experienced mortgage broker who can provide clarity on how much of your equity is usable for a new property purchase. Fill in the form below and a mortgage broker from EE Mortgages will get back to you.

How to Access Equity to Buy Property

In Australia, there are two common types of loans used to access equity: a Line of Credit (LOC) and a Loan Top-Up. A Line of Credit loan allows you to access equity up to a specified limit, similar to a credit card, with flexibility in borrowing and repayment. This option can be helpful for those wanting to make multiple purchases over time or who prefer a revolving credit structure. However, LOCs often come with variable interest rates, which means that repayments can fluctuate based on market conditions.

A Loan Top-Up, on the other hand, involves increasing your existing mortgage balance to access equity funds through refinancing. This approach typically provides a lower interest rate compared to LOCs, as it’s structured like a traditional home loan. However, it also comes with structured repayments, so it lacks the flexibility that a Line of Credit offers. Choosing the right loan type depends on your financial situation, goals, and preferred repayment approach, making it essential to weigh the pros and cons of each option. Speak to a mortgage broker to discuss which is best for your personal situation.

Steps to Use Your Equity to Buy Property

The process of using equity to buy a property generally begins with a consultation with a mortgage broker. They can provide a property valuation, work out your equity, help determine your borrowing capacity, and discuss your options for structuring the loan. Once you understand your borrowing limits, you can begin the search for your next property. When you have found the property you wish to purchase, your mortgage broker can guide you through the entire process of securing a mortgage and using your existing equity to buy your new property.

Keep in mind that lenders assess your application based on factors like risk, credit history, and serviceability, so it’s crucial to have strong financial records and stable income. After choosing a loan product with help from your mortgage broker, the funds from your accessible equity can be used as a deposit on the new property. This process can vary depending on the lender, so seeking guidance from a broker and understanding the timeline is essential for a smooth transaction.

Benefits of Using Equity to Buy Property

One of the primary benefits of using equity to purchase property is the potential to avoid a cash deposit, which can be a significant barrier for many buyers. By leveraging your existing property’s equity, you can secure financing for a new property while conserving cash, making it easier to expand an existing portfolio. Additionally, for investment properties, interest on loans can be tax-deductible, providing a further financial advantage.

Using equity can also accelerate the growth of your property portfolio. With careful planning, leveraging equity can generate rental income from the new property, helping you pay down the mortgage faster and potentially even increasing your overall equity. However, building a property portfolio requires a balanced approach, ensuring you have the financial stability and resources to manage multiple properties effectively.

Risks of Using Equity to Buy Property

Using equity to buy property involves risks, including the potential for over-leveraging, where you take on more debt than you can comfortably manage. Property values can fluctuate, and if the market declines, the equity you accessed could diminish, leaving you with higher debt relative to your property’s value. It’s essential to have a clear repayment plan and consider factors like job stability and emergency savings to manage unexpected situations.

Having a stable financial plan and avoiding over-committing can help mitigate risks. Consider speaking with a financial advisor who can help assess your financial health and develop a long-term strategy. Properly managing equity as an investment tool can support wealth-building, but it’s important to recognise the associated responsibilities and financial risks.

Tax Implications

In Australia, tax implications can arise when using equity to buy an investment property, especially with regard to interest on the new loan. For investment properties, interest expenses are typically tax-deductible, allowing investors to offset some of the loan costs against their taxable income. This can provide a financial advantage for those using equity for investment purposes.

However, it’s crucial to understand the specific tax obligations and potential deductions involved in property investment. Consulting with a tax professional can ensure you’re aware of eligible deductions and are compliant with Australian tax laws. Proper tax planning can help maximise the benefits of your investment while ensuring you’re prepared for tax responsibilities.

Conclusion

Using equity to buy property is a popular strategy for Australians looking to expand their property portfolios. By understanding how equity works and the available loan options, homeowners can leverage this asset to build wealth through real estate. Consulting with financial experts, managing risks, and planning for the long term are essential for making equity a successful tool in property investment.

Seek Free Professional Advice

If you're considering using equity to buy property, it's crucial to seek professional guidance to make informed decisions. Contact a mortgage broker today for personalised advice on calculating your available equity and exploring the best loan options to suit your financial situation.