How to use equity to buy your next investment property

Once you’ve got your foot in the door of the property market it can be a lot easier to purchase your next property. In some cases, you may even be able to use the home equity you’ve built up in your current property to fund the purchase of an investment property.

Here’s everything you need to know about using equity to buy your next investment property.

Home equity vs usable equity

Home equity is the proportion of your home that you own outright. You can easily calculate how much equity you have by subtracting the amount you currently owe on your home from the property’s current value. As an example, if your home is currently worth $600,000 and you owe the bank $400,000, you will have built up $200,000 of home equity. But just because you have $200,000 of equity, doesn’t mean that you can use every last cent of it to fund the purchase of your next investment property. That’s where usable equity comes in.

Usable equity is the portion of equity in your home that you can actually access. Most banks and lenders will only lend up to 80% of a property’s market value. Just like your home equity, calculating your usable equity is easy. Simply work out what 80% of your property’s current value is and subtract the amount you still owe on your mortgage. Based on the figures above, 80% of your home value of $600,000 works out to be $480,000. Take away your outstanding loan balance of $400,000 and that leaves you with $80,000 of usable equity. As you can see, there’s quite a difference between your total home equity and your usable equity.

How much can you borrow?

Once you’ve worked out your usable equity, you can get an idea of your borrowing capacity. In some cases, it can help to use the rule of 4 to figure out what you can afford. For example, if you multiply your usable equity of $80,000 by 4, you can afford a maximum purchase price of $320,000.

The reason for the rule of 4 is that most banks and lenders require a 20% deposit to buy a property. If you have less than 20%, chances are you’ll be up for lender's mortgage insurance (LMI), just as you would for your initial property purchase. So, if the bank was willing to lend you up to 80% of the purchase price of $320,000, that leaves an $80,000 gap that could potentially be covered by your usable equity. But don’t forget to factor in all those additional expenses that come with purchasing a property. From stamp duty and conveyancing fees to building and pest inspections, you’ll need to take these figures into account when running the figures on what you can afford.

And even if you have built up enough usable equity to fund an investment property, that doesn’t guarantee that the bank will let you access it. As part of the refinancing process, many lenders will still take into account a number of different factors, like your income, age, employment, family status and existing debt.

How to turn your equity into an investment property

When it comes to actually using your equity to fund an investment property, you’ve got two main options - a line of credit or a lump sum.

Line of credit

When you take out a line of credit, your bank or lender will approve you for a specific amount based on your usable equity. A line of credit works is similar to a credit card in that you only pay interest on the amount that you borrow, rather than your entire credit limit. You can then use this money as a deposit to put towards your investment property.

Lump sum

Alternatively, you might decide to release the full amount of usable equity you’ve been approved for in one hit, known as a lump sum. Just keep in mind that you’ll be paying interest on that lump sum as soon as you withdraw the cash.

Points to consider before accessing your equity

While using your home equity can be a great way to fund the purchase of your next investment property, it’s important to be across the different factors that could influence your decision.

Know what you can afford

Just because you’ve got the cash on hand to buy a property worth a certain amount doesn't mean you can necessarily afford it. Make sure that you’ve run the numbers to check that you can manage the extra repayments and additional expenses that come with owning an investment property. And make sure you work in a buffer in case interest rates go up and your repayments increase with them.

Make sure your strategies align with your goals

Picking the right property investment strategy depends on your individual circumstances and goals. If it worked for someone else it doesn’t mean you’ll have the same outcome. Make sure you do your research so you can find a property that can help you achieve your goals.

Leave some cash in the bank

Just because you can access a certain amount of your home equity to purchase an investment property doesn’t mean you should use it all at once. It always pays to have a bit of cash in the bank for a rainy day.

Consider the risks

Like all investment options, investing in property doesn’t come without its own set of risks. Make sure to do your due diligence before diving into the world of property investing.

Refinancing with Unloan is simple. Check your eligibility and learn more about our simple 6-step sign up process today.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.