Leveraging your home equity could hold the key to building wealth through an investment property.
For many homeowners, the next investment opportunity may be closer than they think.
If you’ve owned your home for several years, there’s a good chance you’ve built up equity along the way. In the right circumstances, that equity could help you take the next step in your property journey without needing to sell your home or rely solely on cash savings.
Property remains one of Australia’s most popular long-term investment choices, and for good reason. Quality residential property has the potential to provide both rental income and capital growth over time. What many homeowners don’t realise is that their existing home could help provide the foundation for that next purchase.
What is home equity?
Put simply, home equity is the difference between what your property is worth and how much you still owe on your home loan. For example, if your home is worth $900,000 and your remaining mortgage is $350,000, you have $550,000 in equity.
That can be a significant financial resource. More importantly, you may not need to sell your home to put that equity to work.
Using equity to help fund a deposit or purchase costs is often called leveraging your equity. In practical terms, it can allow you to keep living in your current home while using part of the value you’ve built up to help finance an investment property.
Why Perth continues to appeal to investors
For investors considering their options, Perth continues to offer a supportive backdrop. While conditions have shifted since the extreme shortages of recent years, the fundamentals remain appealing. REIWA’s latest Perth market data shows the median house price sitting around $950,000, with median house rents around $750 per week, while rental vacancy remains below the 2.5% to 3.5% range generally considered balanced.
Western Australia’s population growth and migration trends are continuing to support housing demand. Employment opportunities across resources, healthcare, construction, defence, education and professional services are also helping to underpin demand for quality rental accommodation.
Of course, this does not mean every property will make a good investment. Careful property selection, realistic rental assumptions and a clear view of your borrowing capacity remain essential. However, for well-prepared investors with a long-term strategy, Perth’s affordability compared with several larger capital city markets continues to strengthen its appeal.
Using home equity to invest
So, how does using equity to invest work in practice?
In most cases, lenders will allow homeowners to borrow up to 80% of their property’s value, less the amount still owing on the home loan. It may be possible to borrow more, but going above this threshold can mean paying Lender’s Mortgage Insurance, which may add a significant cost.
Accessing equity usually involves refinancing or restructuring your existing loan. Lenders will also assess whether your income can support the additional repayments, and they may apply different criteria to investment lending, including how they treat expected rental income.
An example can help show how lenders may calculate usable, or ‘lending’, equity.
Let’s say Sue owns a home valued at $1,100,000. She has owned the property for about 10 years, and her mortgage has reduced to $540,000. A lender will determine Sue’s lending equity based on 80% of her home’s value less her remaining home loan debt.
For Sue, this works out to be:
- 80% of $1,100,000 (her home’s current value) = $880,000
- $880,000 minus $540,000 (Sue’s home loan) = $340,000
That $340,000 could then be used to help fund the deposit and purchase costs for an investment property. From there, Sue may be able to arrange a separate investment loan for the remaining balance of the purchase price.
In this scenario, Sue is making more of the equity she has built up in her home while preserving her cash savings for other priorities.
Why advice matters
While using equity can be a powerful strategy, it is not something to approach without advice. The way your loans are structured can have a major impact on your cash flow, flexibility and long-term outcomes.
This is especially important because lenders will often structure loans in a way that helps manage their risk. That does not always mean the structure is best suited to your goals as an investor.
That’s why professional advice is essential. Before using home equity to invest, it’s worth understanding your borrowing capacity, likely repayments, tax considerations and the type of property that aligns with your broader strategy.
If you’ve been wondering whether your current home could help fund your next investment, now may be the time to look at the bigger picture.
For many homeowners, building wealth through property may not require starting from scratch. It may begin with making more strategic use of the equity you’ve already built.
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