Unlock Your Wealth: Using Home Equity to Invest in Property

As a homeowner, you have a powerful tool at your disposal that could help you enter the property investment market: your home equity. Equity is the difference between your property's current market value and the amount you still owe on your home loan. It's essentially the portion of your home that you own outright. When property values rise and you make regular repayments on your mortgage, your equity grows.

This guide, brought to you by Ferns Finance, explains how you can strategically leverage that equity to buy an investment property without needing a large cash deposit.

Step 1: Calculate Your Usable Equity

First, you need to understand how much equity you can actually use. Lenders in Australia generally allow you to borrow up to 80% of your property's value without needing to pay Lenders Mortgage Insurance (LMI).

To calculate your usable equity, follow this simple formula:

1. Find the current market value of your property.
2. Multiply the value by 0.8 (or 80%).
3. Subtract the outstanding balance of your home loan.

Example:

• Property Value: A$800,000‍
• 80% of Value: A$640,000‍
• Outstanding Loan: A$300,000‍
• Usable Equity: A$340,000

In this example, your usable equity is A$340,000, which can be used as a deposit for an investment property.

Step 2: Accessing Your Equity

Once you know how much equity you have, there are a couple of common ways to access it:

• Refinancing Your Current Home Loan: This is a popular option where you replace your existing home loan with a new, larger loan. The new loan covers your existing debt plus the additional funds you want to release for your investment. This might also be a chance to secure a better interest rate or more suitable loan features.

• Home Loan Top-Up: You can apply to your current lender for an increase to your existing home loan limit. This option can be simpler than a full refinance, as it doesn't involve switching lenders. The additional funds are released and can be used for your investment property purchase.

Step 3: Use Your Equity as a Deposit

The funds you access from your equity can be used in place of a cash deposit for your new investment property. This allows you to enter the market without draining your savings. You will still need to demonstrate to the lender that you can service both the original loan and the new investment loan. This is where your financial capacity, including income, other debts, and living expenses, is assessed.

Considerations and Risks

While using your equity is a powerful strategy, it's crucial to be aware of the potential risks:

• Increased Debt: You are taking on a new, additional debt. This will increase your monthly repayments and overall financial commitment.‍
• Interest Rate Fluctuations: An increase in interest rates could make repayments on two loans more difficult to manage.‍
• Cross-Collateralisation: Be mindful of this strategy where both your primary residence and the new investment property are used as security for both loans. This can limit your flexibility in the future.‍
• Market Downturns: A fall in property values could leave you in a position of negative equity, where your loan amount is higher than the property's value.

For personalised, expert advice on your specific circumstances, it's essential to consult with a qualified professional. The team at Ferns Finance Brokers can help you navigate the complexities of this process, assess your eligibility, and find the right loan structure from over 60 lenders to match your property investment goals.

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