Buying an investment property can be a strategic way to build long-term wealth and create financial security in your retirement.
Many people get started as investors byaccessing the equity in their home, to use as a deposit on a second property. Here’s how it works:
- You have your home valued by your bank. Let’s say it values at $750,000.
- You calculate your equity by subtracting your current loan balance from the total value. For example: If your loan is $400,000, then you have equity of $350,000, as equity is the difference between the market value of your home and the amount you owe.
- Next, calculate your useable equity. Banks are generally comfortable lending up to 80% of the value of your home, minus the amount you owe to the bank. In our example, 80% of $750,000 is $600,000, so the useable equity is $200,000.
- You may be able to leverage this equity in your home as a deposit on an investment property.
How does using equity to invest in property actually work?
To access your equity, borrowers will generally refinance their existing home or top up their existing loan. The bank’s decision to grant you access to your equity will depend on things like your income, debts, and the value of the property.
You’ll then use that money as the deposit and take out a new loan for the investment property, with the same lender. You then have two properties, which may grow in value over time.
In the above example, it might look like this:
Amount | Notes | |
Existing home loan | $400,000 | Total property value is $750,000 |
Investment property price | $500,000 | Total property value is $500,000 |
Equity accessed | $120,000 | A deposit of $100,000, and a further $20,000 to cover stamp duty and other buying costs |
Remainder of the investment loan | $400,000 | This combined with the $100,000 deposit accessed in equity covers the full purchase price |
Total property values | $1,250,000 | $750,000 own home + $500,000 investment property |
Total debts | $920,000 | $400,000 own home + $120,000 equity release + $400,000 investment loan |
Things to consider before using your equity to invest in property
- Think about your long-term goals. Investing in property may help you achieve your financial goals, but as with all investments, there are potential risks to be mindful of, so make sure you do your market research to buy a property that will help you reach your goals.
- Have a rainy-day fund. Only invest if you’re comfortable you can afford the repayments on both loans for a short period, if you’re between tenancies or your tenant stops paying rent for some reason. You can also use this for maintenance and repairs.
- Keep in mind the tax implications. Investment properties may be eligible for tax deductions and negative gearing, but the true benefit of this to you will depend on your income and situation.
- The best loan type to suit your goals. Many investors choose an interest-only loan, as the principal part of the repayment is not tax-deductible. It’s a good idea to get professional advice from an accountant or financial planner for personalised advice.
