Using equity to buy an investment property

Using equity to buy an investment property

Are you watching others around you build their property portfolios and wondering how to buy your own investment property without blowing all your savings? If you own a home, you could harness the power of your home equity to get a kick start.

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

EXAMPLE

If your home is worth $400,000 and you owe $250,000 on your mortgage, your equity is $150,000.

If you are buying an investment property, you can access 80 percent of your home equity ($120,000 in this case) as security, which eliminates the need for a deposit. This is your useable equity.

As a guide to calculating how much you can borrow for your investment property, according to the NAB’s website, a simple rule of thumb is to multiply your useable equity by four. In the above example, it means the maximum purchase price for the investment property would be $480,000. But the real amount you can borrow will depend on a number of variables and will depend on your lender.

Do your sums

Financial planner Deborah Kent, owner of Integra Financial Services, says using your existing home equity is an accessible way to enter the property market. However, she advises caution before making the leap:

“You really have to do the numbers and look at all the costs owning property entails.”

“If you are buying an apartment, look at costs such as strata fees, how much money is in the sinking fund, whether the building is old and will need work in the near future. All these expenses impinge on your investment return.

“If you are buying a house, keep in mind that while any maintenance you do is tax deductible, if you’re paying $2500 on maintenance you’ll potentially get only half of that back.”

On the home front

Kent also reminds would-be property investors that it is important to repay the home loan on your home as fast as possible.

“The number one rule of financial planning is to pay off your own mortgage because you do not receive any tax breaks,” she says.

“But if you are in a bracket where your income is high and you have good cash flow, there is no reason not to use your home equity to buy an investment property.”

Compare investment property loan rates:

Related links

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

What is a redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Does Real Time Ratings' work for people who already have a home loan?

Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

Mortgage Calculator, Repayments

The money you pay back to your lender at regular intervals. 

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Mortgage Calculator, Loan Amount

How much you intend to borrow.