How to use equity to buy my first investment property

4 mins
Updated
December 20, 2024

Equity is one of the most powerful tools for property investors. If you already own a home, your equity could be the key to purchasing your first investment property without needing to save a massive deposit. Understanding what equity is, how it works, and how to use it effectively can help you leverage your assets to grow your wealth.

What is equity?

Equity is the difference between the current market value of your property and the amount you owe on your mortgage. For example:

  • Current Property Value: $800,000
  • Mortgage Balance: $500,000
  • Equity: $800,000 - $500,000 = $300,000

Equity grows over time as:

  1. You pay down your mortgage.
  2. Your property's market value increases.

‍

Types of equity

Total equity

This is the full amount of equity you own in your property, as calculated above.

Usable equity

Usable equity refers to the portion of your total equity that lenders allow you to access for borrowing. Most lenders let you borrow up to 80% of your property’s value, minus your mortgage. For example:

  • 80% of property value: $800,000 × 80% = $640,000
  • Usable equity: $640,000 - $500,000 = $140,000

This $140,000 is what you can potentially use as a deposit for your investment property.

‍

How to use equity to buy an investment property

Step 1: Determine your usable equity

Get your property valued by your lender or a professional to determine its current market value. Subtract your remaining mortgage balance to calculate your usable equity.

Step 2: Speak with a mortgage broker

A mortgage broker can assess your borrowing capacity and guide you on how much you can borrow using your equity. They’ll also help you understand the implications of leveraging equity for an investment loan.

Step 3: Choose the right loan structure

When using equity, there are two common methods to fund your investment property:

  1. Equity loan (top-up loan): This involves increasing your existing home loan by the amount of usable equity. The extra funds act as the deposit for your investment property.
  1. Cross-collateralisation: In this method, both your existing property and the new investment property are used as security for the loan. While this can allow you to borrow more, it’s riskier as both properties are tied to the same loan.

Step 4: Purchase the investment property

Once your lender approves the loan, you can use the released equity to pay for the deposit and associated costs, such as stamp duty, legal fees, and inspections.

‍

Benefits and risks of using equity to purchase an investment property

Benefits

  • No need for a cash deposit: Using equity eliminates the need to save a traditional deposit, accelerating your entry into property investment.
  • Leverage to grow wealth: Equity allows you to leverage your existing assets to acquire additional properties, potentially compounding your returns.
  • Tax benefits: Interest on the investment loan is often tax-deductible, which can reduce your overall tax burden.

Risks

  • Increased debt: Using equity means taking on more debt. Ensure you can manage the additional loan repayments, even during financial challenges like rising interest rates or property vacancies.
  • Market fluctuations: If property values drop, your equity could decrease, putting you at risk of negative equity (owing more than the property is worth).
  • Impact on cash flow: While leveraging equity can build wealth, it’s essential to maintain strong cash flow to cover all property-related expenses.

‍

Equity is a powerful resource that can help you buy your first investment property and kickstart your journey to building wealth. By understanding how equity works and working with the right professionals, you can leverage your existing property to grow your portfolio strategically. Ready to take the plunge? Start by assessing your property’s equity and exploring your borrowing options today.

Disclaimer
Prepared by Beck McLean Finance Pty Ltd ABN 80 632 809 833. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.
continue reading

Found that helpful?
There's more just like that.

Low doc loans in Australia: flexible lending options when traditional banks say no

In today’s complex financial landscape, not everyone fits neatly into the lending criteria of traditional banks. Entrepreneurs, self-employed professionals, freelancers, and small business owners often find themselves shut out by the mainstream lending system due to a lack of conventional documentation. This is where low documentation (low doc) loans come in – a lifeline for many Australians who need flexibility, not red tape.

Green home loans: rewards for energy efficiency

As awareness of environmental issues continues to grow, many homeowners are becoming more focused on reducing their carbon footprints and adopting energy-efficient practices. In response to this demand, lenders in Australia and around the world have introduced Green Home Loans, which offer incentives for homeowners who invest in energy-efficient properties or make eco-friendly upgrades to their homes. These loans not only help to create a more sustainable environment but can also deliver long-term financial benefits to homeowners. In this article, we explore what green home loans are, how they work, and examples from some of the major lenders in Australia.

Negative gearing explained

Negative gearing is a term you’ve likely heard in the context of Australian property investment, but what does it really mean—and how does it impact investors, the housing market, and taxpayers? In this article, we’ll break down the concept of negative gearing, how it works in practice, and the pros and cons associated with it.