How to use equity to purchase an investment property?
Introduction
Thinking about getting into the property market? Using the equity in your home could be a great option. Instead of waiting to save up a large deposit, you can tap into the value already built up in your home and use it to invest in your next property.
The national capital city median house price surged by 1.3% over the November quarter, reaching $1,270,561 compared to the October quarter. Meanwhile, national house prices have increased by 9.1% over the past year, reflecting growth across both urban and regional areas.
With property prices still climbing, now might be the perfect time to leverage the home equity and take advantage of the market trends. The good news is that with the right strategy, you could be in a position to benefit from both rental income and long-term capital growth.
In this blog post, we will break down how you can use your home equity to buy an investment property, the pros and cons to consider, and some key steps to take along the way.
Key takeaways
- Equity is the difference between your property’s market value and your remaining loan balance.
- Usable equity is usually capped at 80 per cent of your home’s value minus the loan owed.
- Lenders generally require at least 20 per cent of the property price plus upfront costs.
- Seeking professional support ensures your equity strategy aligns with both your finance and tax goals.
What is equity?
Equity is simply the difference between the current market value of your property and the amount you still owe on your home loan.
For example:
- Current property value: $800,000
- Remaining loan balance: $400,000
- Equity = $400,000
Why use equity to buy an investment property?
Equity can make property investment more accessible because it allows you to use the value you have already built in your home instead of saving a new deposit from scratch. This can speed up the process of purchasing your next property and open up opportunities you might otherwise miss.
Some of the other key advantages include:
Tax benefits: Interest on loans for investment properties may be tax-deductible, and you may also be able to claim depreciation and certain expenses to reduce your taxable income.
Wealth growth: An extra property can provide rental income while also giving you the chance to benefit from capital growth across more than one asset.
Increased borrowing capacity: Equity can sometimes allow you to borrow more than you could with just your savings and income, giving you a wider choice of investment opportunities.
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How much equity do you need?
When you buy an investment property using equity, lenders usually require at least 20% of the purchase price to be covered as a deposit. On top of this, you also need to allow for upfront costs such as stamp duty, legal fees, and inspections, which often add another 5% of the property’s value.
For example, on a $600,000 property in New South Wales, the deposit would be $120,000, and the costs would be about $25,000, meaning you would need around $145,000 in usable equity to proceed. Usable equity is the part of your property’s value that a bank is willing to lend against.
To work it out, take 80 % of your home’s current value and subtract the remaining balance of your mortgage. If your home is valued at $600,000 and your loan balance is $300,000, then 80% of the value is $480,000. After subtracting the $300,000 still owing, the usable equity available is $180,000.
This amount acts as your deposit for the investment property. In this example, $180,000 would be enough to cover the 20% deposit and purchase costs on a property worth up to about $720,000.
Lenders, however, will also check whether you can manage the additional repayments by assessing your income, expenses, debts, and credit history before approving the loan.
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Points to consider before accessing your equity
Before using your home equity to purchase an investment property, keep these points in mind:
Review your goals
Think carefully about what you want to achieve. If your aim is long-term wealth creation, you may lean toward properties with strong growth potential. If your aim is to boost cash flow, you may prefer properties with higher rental yields. Having clear goals helps you choose the right property and loan structure.
Test your budget
Owning an investment property comes with ongoing costs. Apart from loan repayments, you’ll need to cover rates, insurance, maintenance, and management fees. Run the numbers to see if you could still manage comfortably if interest rates rise or if the property is vacant for a period. Planning ahead ensures your finances remain stable.
Keep a reserve
It can be tempting to use all of your available equity, but leaving a portion untouched is often smarter. A financial buffer allows you to handle unexpected repairs, tenant turnover, or even personal income changes. It also means you’ll have flexibility if another opportunity comes along in the future.
Watch the market
Property values don’t always increase. If the market drops, your available equity could reduce, and in some cases, you may owe more than the property is worth. By understanding market cycles, you can prepare for possible changes and avoid being caught off guard.
Understand lender rules
Each lender has its own approach to equity. Some will let you borrow up to 80% of your property’s value, while others may set different limits or apply stricter conditions. Loan features, interest rates, and approval requirements can also vary. Comparing options with a broker helps you choose the structure that best supports your plans.
Be aware of the risks
When you draw on equity, be mindful of the possible risks. The most common are listed here.
What are the steps involved in using equity to buy an investment property?
So now, if you’ve decided to put your existing equity to work, here are the steps to follow:
1. Speak to our loan specialists
The first step is to connect with our team and understand exactly how much equity you can access and how best to use it. Because we are both mortgage brokers and tax accountants, we review your position from every angle. Our specialists will:
- Calculate the usable equity available in your property
- Assess your borrowing power by looking at income, expenses, and existing commitments
- Explain the different loan options available, including refinancing your existing mortgage or setting up a new investment loan.
- Ensure the finance strategy is structured correctly from a tax perspective, so you are set up from the start
- Help you secure a pre-approval, giving you a clear idea of your purchasing budget before you begin your property search
This first step provides a solid foundation for the entire process. Without it, you risk moving forward without clarity on what you can borrow or whether the strategy is viable.
2. Get a property valuation
A professional valuation of your current property is a key step in the process. Lenders rely on their own valuation, not your estimate, to decide how much equity you can access. This figure directly impacts your borrowing capacity and determines the budget for your investment purchase.
What often surprises homeowners is that valuations can vary widely. One lender may take a conservative approach and value your property lower, while another may provide a higher figure that unlocks more usable equity. Even a difference of a few percentage points can mean tens of thousands of dollars in available funds.
At ZedPlus, we partner with a network of more than 40 lenders. This wide access allows us to compare valuations across different institutions and find the one that best supports your investment goals. By exploring multiple options, we increase your chances of unlocking the full potential of your equity.
3. Choose how to access and structure your loan
Once your usable equity is confirmed, the next step is to decide how to release it and make sure the loan is set up correctly. The decisions you make here will affect your repayments, flexibility, and long-term tax outcomes.
Ways to access equity include:- Home loan top-up: Increase the limit on your existing mortgage to release funds. This option is straightforward but increases your current loan balance and repayments.
- Supplementary loan account: Open a separate loan secured against your property. This often allows different terms, such as a fixed rate or tailored repayment schedule.
- Cross-collateralisation: Use both your current home and the new investment property as security for on loan. While this can help with approval, it may reduce flexibility if you want to sell or refinance later.
- Interest-only vs principal-and-interest: Interest-only loan repayments reduce short-term costs, while principal-and-interest steadily lowers the loan balance.
- Separate loans: Keeping investment and personal loans separate makes it easier to manage repayments, track performance, and claim tax deductions.
- Offset accounts: Linking an offset account reduces interest costs while giving you access to funds when needed.
- Interest on investment loans is usually tax-deductible.
- Expenses such as depreciation, insurance, management fees, and repairs may also be deductible.
- Keeping investment debt separate from personal debt simplifies reporting and ensures deductions are accurate.
By bringing all these elements together, you ensure that the equity you unlock is not only available for your investment but also managed in a way that supports cash flow and maximises long-term financial benefits.
4. Use equity as the deposit
Once your equity is released, it can serve as the deposit for your investment property. This allows you to invest without needing to save a large cash deposit. By using your equity, you can cover upfront costs such as the deposit, stamp duty, and other fees, while still keeping your savings intact for unexpected expenses or future opportunities.
5. Find and purchase the property
With your deposit secured through equity, the next step is to identify an investment property that suits your goals. After you make an offer, the lender will arrange finance for the remaining purchase price and confirm all requirements before the purchase is completed.
This stage usually involves:
- A valuation of the property you are buying
- A review of your financial documents and commitments
- Confirmation of the loan structure agreed earlier
- Issuing unconditional approval so the purchase can proceed
By this point, your equity deposit and the investment loan come together to cover the full property price.
6: Settlement and beyond
Settlement is the stage where your equity deposit and investment loan are brought together to complete the purchase. On settlement day, the lender transfers funds to the seller, and you officially take ownership of the property.
From this point forward, the focus shifts to managing your investment. That means making sure the property generates enough income to cover its costs, keeping detailed records for tax purposes, and reviewing your loan structure regularly to ensure it remains efficient. Over time, you may also be able to build further equity, which can be leveraged again to expand your property portfolio.
Final thoughts
You now have all the important details about using your equity to invest in property. The next step is to put that knowledge into action. Our expert team at ZedPlus is ready to help you unlock your equity, structure the right loan, and align it with your investment goals. Reach out to us today to start building your path to financial growth through property.
