Using equity to buy an investment property

A popular way to buy an investment property is to use the equity in your existing home, meaning you don’t have to put any physical cash towards the deposit. Here’s how to calculate and use your available equity.

What’s home equity?

Quite simply, it’s the difference between the value of your property and the outstanding debt on your home loan. For example, if Sarah’s home is worth $500,000 and the current debt on her home loan is $320,000, then she has $180,000 worth of equity in her house.

How to calculate your usable equity

A common misconception is that you can use all your equity to buy an investment property. In most instances, you could borrow up to 80% of the value of your home.

With this in mind, here’s how Sarah can calculate her usable equity:

  • Calculate 80% of the value of Sarah’s home: $500,000 x 80% = $400,000
  • Take the 80% value of Sarah’s home and subtract her current outstanding debt: $400,000 - $320,000 = $80,000.

This means Sarah has $80,000 worth of usable equity to put towards a deposit for an investment property, as well as other buying costs like stamp duty and settlement fees.

If the usable equity isn’t enough to cover the full deposit and any stamp duty and settlement costs, Sarah will also have to make a cash contribution.

How much can you borrow with your equity?

In most instances, you need a 20% deposit to get a home loan to buy an investment property.

Therefore, if Sarah uses $80,000 worth of equity as a deposit, she could purchase a $400,000 investment property – assuming she covers stamp duty and settlement fees with money she’s saved, and she meets the necessary criteria to get the loan.

It’s possible to buy an investment property with a deposit lower than 20%, but you’ll most likely have to take out Lenders’ Mortgage Insurance (LMI). This means you’ll probably have to pay an additional fee (approximately 2 to 3% of the loan amount), and your interest rates on the investment loan may also be higher.

When it comes to your usable equity and borrowing power, a Home Lending Specialist can talk you through the possibilities.

Weighing up the pros and cons

Using equity is a great option to potentially lock in a better interest rate, and avoid paying Lenders’ Mortgage Insurance (LMI). Keep in mind that the property you’re taking equity from will become additional security for your new loan as well – we call this cross-collateralisation. In the future, this means any decisions you make to one loan or property may impact the other.

For example, if you sell one property later, the money from the sale may be used to reduce your other loan. It all depends on the value of the property you’re keeping and how your remaining repayments might impact your situation.

Frequently asked questions

We’re here to help

1

How do I build equity in my existing home?

There are a few things you could do:

  • make extra or more regular repayments to decrease the amount you owe in a shorter timeframe (if your loan conditions allow)
  • use an offset account (if you're eligible) to save on interest and make your repayments go further
  • make renovations to your home to increase its value (since equity takes into account the market value of your home).
2

How long until I have enough equity to buy an investment property?

This depends on the purchase price of the property you want and the equity you already have – a Home Lending Specialist or broker will be able to give you specific advice based on your situation.

3

How much deposit do I need for my second property?

As a general rule, you should aim for a 20% deposit for your second property. Remember, your usable equity that you could put towards a deposit for a second property is 80% of the current value of your home, subtract your current outstanding balance owing. If that’s not enough, you’ll need a cash contribution to make up the 20% (plus fees).

4

What’s a property valuation report?

It’s a detailed report of the property that outlines what a property is worth at a particular time, based on the specific construction and details of the property.

We’re here to help

Get in touch with a Home Lending Specialist, and they’ll respond within one business day. You can talk on the phone, meet at a branch, or have a Mobile Lending Manager come to you.