Should You Use Home Equity To Renovate Or Buy An Investment Property?

While some borrowers choose to put that money back into their homes in the hopes of increasing its value, others choose to grow their wealth by purchasing an investment property. So, which option is better? 

Ultimately, there’s no right or wrong answer. Each option comes with its own advantages and disadvantages that are often based on your individual circumstances. Let’s take a closer look at how to choose between using equity to renovate or buy an investment property.

Using equity to renovate

You could consider using equity for renovations to help you improve your living space and increase the value of your home. But before you go sinking your equity into a renovation, it’s important to weigh the pros and cons against your long-term financial goals to make sure it’s the right choice for you.

Pros of renovating

• Increased home value: Renovations can significantly increase the value of your home, especially if you focus on high-return projects like kitchen and bathroom remodels.

• Improved living space: Renovating can enhance your living conditions and improve your quality of life. Not to mention, completing a renovation can give you a sense of accomplishment and you can start to enjoy the upgraded space once the project is complete.

• Cheaper than buying a new property: Although renovating can be an expensive exercise, it’s typically cheaper than buying a whole new home. Plus, you’re often able to personalise your space to suit your style. 

Cons of renovating

• Overcapitalisation: Renovations and improvements don’t come cheap and it can be easy to quickly blow out your budget. Spending too much on renovations that don't proportionately increase the home's value can result in financial loss.

• Changing market conditions: If the housing market declines, you might not recoup the renovation costs when selling. Especially if you’ve overcapitalised.

• Increasing debt: When you use your home equity to fund a renovation, you’re essentially increasing your debt. This can be risky if your financial situation changes and impacts your ability to make higher loan repayments. For example, if you lose your job or come across unexpected expenses, you could find yourself in financial stress.

Using equity to buy an investment property

Alternatively, you might be wondering whether you’re better off buying an investment property with the equity you’ve built up in your current home. Here are a few of the main advantages and disadvantages of investing in property with your equity.

Pros of buying an investment property

• Potential for passive income: Depending on your investment strategy, investment properties can provide a steady stream of rental income.

• Property appreciation: Over time, the value of the investment property might increase, leading to capital gains when you sell.

• Diversification: Investing in property can help diversify your investment portfolio.

• Tax benefits: You might be able to deduct expenses related to the investment property, such as mortgage interest, council rates and maintenance costs.

Cons of buying an investment property

• Tenant issues: Managing rental properties can be challenging due to tenant turnover, late payments and property damage. While you can bring in a professional property manager to take care of your investment property, paying for this service will eat into your rental income. 

• Market volatility: Real estate markets can be unpredictable, and property values can decline. This could lead to capital losses when it comes time to sell.

• Ongoing costs and maintenance: Investment properties require ongoing maintenance and repairs, which can be costly and time-consuming.

• Financial strain: Taking on a second mortgage or additional debt increases your financial obligations and risk. It’s important to make sure you can cover the cost of your investment property in the event it were to sit unoccupied for a period of time. 

Tips on how to use equity to renovate or invest in property

Whether you decide to renovate your home or buy an investment property, we’ve pulled together a few tips together to help you access your equity.

Work out your home equity

Start by figuring out the amount of equity you have in your home loan. All you have to do is subtract the amount you still owe the bank from the current value of your home. That will give you an idea of your home equity.

Let’s say your property has been valued at $650,000 and you still owe $350,000 on your mortgage, you would have $300,000 in equity.

Calculate your usable equity

Just because you’ve built up a certain amount of equity in your home doesn’t mean you’ll be able to use it all. Instead, most banks and lenders will let you tap into 80% of a property’s market value.

To work out your usable equity, all you have to do is work out 80% of your property’s current value and subtract the amount you still owe to the bank. This will leave you with your usable equity that you can either put towards renovations or an investment property.

Based on the figures above 80% of $650,000 is $520,000. Once you take away the $350,000 you still owe on your mortgage, you’re left with $170,000 of usable equity.

Find an equity home loan to suit your needs

There’s more than one way to tap into the equity in your home, so it's important to find a finance option that best suits your needs. This can include:

• Lump sum: A lump sum payment secured against your property.
• Line of Credit: A flexible loan that allows you to draw funds as needed.
• Top up: This involves borrowing against the equity in your property to add additional funds to your existing home loan.
• Redraw Facility: If you’ve been making extra repayments on your mortgage, you can redraw these funds for renovations.

If you’re keen to tap into your equity to fund a renovation or investment property, it could be worth refinancing your property. Check out what’s on offer when you make the switch to Unloan. 

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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. 

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.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.