A question we often get asked is how can you go about using equity to buy property.
Often people don’t think they can afford to buy an investment property because they have not saved enough cash for a deposit. However, cash is not always what is needed. This article explains the process to determine how much equity you may actually have in your home and outlines the steps to get started on your property investment journey without needing an additional cash deposit.
In terms of property, equity is the difference between the current value of a property and any amount owing on that property (e.g., mortgage amount). The equity position is based on a bank valuation (determined by an independent valuer engaged by the bank), not the market value (what the property might actually sell for if listed).
How to Check if Using Equity to Purchase Another Property Is Possible
If you have owned your home for several years, it is likely the value of your home has increased since purchase. You may also be paying down your mortgage, reducing the amount owing gradually every month. This creates a situation where equity is accumulating in your home.
Example: A home worth $1,500,000 with a $500,000 mortgage has $1,000,000 equity, a strong position for leveraging to buy another property.
Generally, banks allow borrowing up to 80% of a residential property’s value without requiring Lenders Mortgage Insurance (LMI), subject to lending assessment criteria. LMI only applies when borrowed funds exceed 80% of the property value when using equity to purchase another property.
This means you can potentially access additional funds held as equity. Using the example above, borrowing up to $1,200,000 (80% of $1,500,000) minus the $500,000 mortgage leaves $700,000 available to use toward an investment property.
Important Steps When Using Equity to Buy Another Property
Step 1 – Ask your lender for a valuation
Bank valuations, not market values, determine how much equity you can access.
Step 2 – Calculate your available equity
Formula: Bank Valuation × 0.8 – Existing Mortgage = Available Equity
Step 3 – Re-mortgage or refinance to access the equity
Typically set up as a separate loan facility. Speak with a licensed mortgage broker or lending manager. Consider tax implications with your accountant.
Step 4 – Avoid cross collateralisation
Using your home as security for an investment property exposes it to risk. Ask your broker or bank to explain if unsure.
Step 5 – Ensure affordability of the new investment
Lending criteria will assess your capacity to manage additional repayments when using equity to purchase another property.
What Is the Benefit of Using Equity to Buy Property?
Using equity from your home as a deposit allows you to start property investment without relying on cash savings. This strategy can accelerate your investment journey and get you ahead in building your portfolio.
It is always recommended to seek advice from an accountant or mortgage professional to structure the investment optimally.
What Are the Risks When Using Home Equity for Property Investment?
Leveraging your home carries risk. Key considerations include affordability, exposure to market fluctuations, and avoiding cross collateralisation. Professional guidance helps minimize these risks.
Getting Started With Equity-Based Property Investment
Using equity to purchase another property is a practical way to enter property investment without waiting to save a cash deposit. At Streamline Property Buyers, one of Brisbane’s most awarded buyers agents, we help investors and home buyers focus on properties that align with their preferred investment strategy.
By combining your equity position with careful strategy planning, our team helps investors make informed decisions. From market research and analysis to competitive offers, negotiation, and risk management, our team ensures the properties you select match your financial goals, reduce holding costs, and achieve sustainable performance over time.
This approach allows you to accelerate your property investment journey using the equity you already have, while managing risks and maximising long-term growth potential. Whether you are starting your first investment or expanding your portfolio, professional guidance ensures your strategy is structured correctly for your circumstances, helping you make the most of your available equity.
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