Have you been thinking about investing in property but don’t have a large cash deposit?

If you’ve owned your home for a few years, you may already have one of the biggest resources needed to purchase an investment property: your home equity.

As property values increase and your home loan balance decreases, the equity you’ve built can potentially be used to help fund your next property purchase. This means you may not need to save another full deposit before entering the investment property market.

Let’s understand what home equity is, how it works, how much you may be able to access, and what to consider before using equity to buy an investment property.

What Is Home Equity?

Home equity is the difference between your property’s current market value and the amount you still owe on your home loan.

For example,

If your Current home value is $900,000, and your Remaining mortgage is $500,000. Your total equity: $400,000.

Why Use Equity Instead of Saving Another Deposit?

Many Australians choose to use their available equity because it allows them to invest sooner rather than waiting years to save another deposit.

Some potential advantages include:

  • Enter the market earlier

Property prices may continue rising while you’re saving. Using equity may help you purchase sooner.

  • Keep your savings intact

Instead of using your savings for a deposit, you may keep them available for emergencies or renovations.

  • Build your investment portfolio

Using equity strategically can help you purchase additional properties over time, provided you can comfortably manage the repayments.

  • Potential tax advantages

Interest on loans used for investment purposes may be tax-deductible. To understand your situation, always seek advice from a qualified professional regarding your individual circumstances.

How Does Using Equity Work?

There are several ways lenders may allow you to access your home’s equity.

Option 1: Refinance Your Existing Home Loan

You may refinance your current mortgage to increase the loan amount and release available equity.

The released funds can then be used toward purchasing your investment property.

Option 2: Equity Release Loan

Some lenders allow you to establish a separate loan secured against your existing property.

This can make it easier to distinguish between your owner-occupied and investment borrowings.

Option 3: Line of Credit

Depending on your financial situation, a lender may offer a line of credit secured by your property.

This provides flexibility but requires disciplined financial management.

How Much Equity Can You Access?

Every lender has different lending policies. The amount available generally depends on:

  • Current property value
  • Remaining home loan balance
  • Your income
  • Existing debts
  • Living expenses
  • Credit history
  • Employment stability

A property valuation is usually required before the lender confirms your available equity.

Can Equity Cover the Entire Deposit?

In many situations, yes. Available equity may be sufficient to cover:

  • Deposit
  • Stamp duty
  • Conveyancing costs
  • Loan application fees
  • Government charges

However, you’ll still need to demonstrate that you can comfortably afford both your existing mortgage and the new investment loan.

What Do Lenders Assess?

Even if you have substantial equity, lenders will still carefully assess your financial position. While this may vary depending on the lender’s policies, lenders typically consider your:

  • Income: Your salary, rental income, business income or other eligible earnings.
  • Existing Loans: Current mortgages, personal loans, car finance and credit cards.
  • Living Expenses: Your regular household expenses are used to calculate affordability.
  • Credit History: A strong repayment history improves your borrowing position.
  • Employment: Stable employment generally strengthens your application.

Risks to Consider

Using equity can be a smart strategy, but it’s important to understand the risks involved.

  • Higher Loan Balance: Borrowing against your equity increases your overall debt.
  • Interest Rate Changes: Higher interest rates could increase your repayments.
  • Property Market Fluctuations: Property values may rise or fall over time.
  • Cash Flow: Ensure rental income and your personal income are sufficient to manage repayments during vacancies or unexpected expenses.

Is Using Equity Better Than Paying Cash?

There isn’t a one-size-fits-all answer. For some investors, using equity preserves savings and offers greater flexibility, whereas others may prefer to use cash to reduce borrowing.

The right approach depends on your:

  • Financial goals
  • Income
  • Risk tolerance
  • Investment strategy
  • Long-term plans

Speaking with an experienced mortgage broker can help you determine the most suitable option.

Start Your Property Investment Journey with Goodwill Finance

If you’re considering buying an investment property, your existing home could help make it possible.

At Goodwill Finance, we assess your financial situation, estimate your available equity, compare suitable loan options from over 30 lenders, and guide you through every step of the process. Whether you’re purchasing your first investment property or expanding your portfolio, we’re here to help you make informed borrowing decisions. You can contact us by emailing us at [email protected] or calling us at 0423 459 480.

Disclaimer: The information provided is of a general nature and does not take into account your personal financial circumstances, goals, or needs. It should not be considered financial or investment advice, nor a recommendation or invitation to acquire financial products or services. You should not act solely on this information without obtaining professional financial advice tailored to your situation. Any loan application is subject to a full assessment of your financial position, as well as the lender’s terms, conditions, fees, charges, and eligibility criteria.