If you’re a homeowner, the equity you’ve built could be the key to unlocking your next property investment and even the start of a growing portfolio. Here’s how it works.
What is Home Equity?
Home equity is the portion of your property that you truly own. It’s calculated as the difference between your home’s market value and the amount remaining on your home loan.
For example, if your home is valued at $750,000 and you owe $350,000 on the mortgage, your equity is $400,000. While you may not be able to access all of this, lenders will often allow you to draw on part of it to fund the purchase of another property.
How much equity do you need?
Generally, lenders are comfortable with you borrowing up to 80% of your home’s value without lenders mortgage insurance (LMI). This means your usable equity is your total equity minus 20% of the home’s value.
Using the same example:
- Home value: $750,000
- Total equity: $400,000
- Minimum buffer (20%): $150,000
- Usable equity: $250,000
In this case, you may be able to borrow $250,000 to put towards an investment property. Depending on your lender, opting to pay LMI could give you access to even more.
How much can I borrow?
Much like buying your first home, a lender will generally provide up to 80% of the value of an investment property. So once you know your usable equity, you can estimate your purchasing power.
As a guide, multiply your usable equity by four.
- Usable equity: $250,000
- Potential purchase value: 4 x $250,000 = $1,000,000
That gives you a $1 million budget with a 20% deposit of $250,000.
Just remember to allow for additional upfront costs, such as stamp duty, legal fees and inspections.
Growing your portfolio with equity
One of the most powerful aspects of property investment is the ability to leverage equity to grow your portfolio over time. As you pay down your loan and your property values increase, your equity grows. This creates opportunities to reinvest and purchase additional properties.
The effect is compounding: each rise in value can amplify your total equity across multiple properties, accelerating your portfolio growth. Of course, it’s worth noting the same works in reverse, in a downturn, your losses may also be magnified.
Should I use my existing home loan?
One of the advantages of investing in property is the potential to offset loan interest and expenses against your income. If you fund an investment property through your existing home loan, you may lose the ability to separate investment debt from personal debt, which can impact tax effectiveness.
For this reason, it’s important to speak with a financial adviser or mortgage specialist before making any decisions. The right loan structure could make a significant difference to your long-term results.
Using your home equity to purchase an investment property can be a smart strategy to build wealth over time. With careful planning, professional advice and the right finance structure, your current home could be the springboard to a successful property portfolio.
Where to from here?
Looking to turn your home equity into a smart investment? At Cedar Woods, we create communities designed to deliver both lifestyle and long-term value. Explore our range of properties and discover the right home to kickstart or grow your investment portfolio. Click here find your next opportunity with Cedar Woods.
Disclaimer: The information provided here is general in nature and does not take into account your personal goals, financial situation or needs. Some content may be provided by third parties, and we are not responsible for its accuracy or reliability. We make no guarantees about the information and accept no liability for any errors or omissions. Before making any decisions, we strongly recommend seeking independent professional advice.
