Owning a home in Australia comes with more than just a sense of security. For many homeowners, it opens up opportunities to grow wealth through property investment. One common way to start this journey is by tapping into the equity you’ve built in your home. The good news? This method can significantly reduce the financial barriers that might have stopped you from purchasing an investment property.
In this article, we’ll unpack how you can use your home equity to purchase an investment property, the steps involved, and which lenders or brokers can guide you through the process. If you’re serious about wealth-building, then getting into property investment can be a rewarding way to put your home equity to work.
What is Home Equity?
First, let’s make sure we’re on the same page about home equity. Equity is essentially the difference between the market value of your home and the amount you still owe on your mortgage. For example, if your house is worth $700,000, and your mortgage balance is $400,000, you’ve got $300,000 in equity.
This $300,000 doesn’t just sit there. It can be leveraged to secure financing for other investments—most notably, another property. Using your home’s equity as security for a new loan allows you to borrow without having to save a massive deposit, which can fast-track your investment goals.
How Do You Tap into Your Equity?
There are a couple of ways homeowners can access their equity to buy an investment property:
Refinancing
Refinancing is the most common route for using equity. This involves restructuring your current home loan to release some of the equity you’ve built. Essentially, you’ll take out a new loan that’s larger than your remaining mortgage and use the difference as your deposit for an investment property.
For example, if your home is worth $700,000 and your loan balance is $400,000, a bank may allow you to borrow up to 80% of the property’s value ($560,000). You’d pay off the existing $400,000 mortgage, and the remaining $160,000 could be used to finance your new investment.
Line of Credit
Some lenders offer a home equity line of credit (HELOC). This works a bit like a credit card, where you can borrow against the equity in your home up to a certain limit. You only pay interest on the amount you use, and the rest of the credit remains available for future use. This method can give you a flexible way to fund your investment property without having to refinance your entire home loan.
Split Loan
A split loan allows you to separate your home loan into two parts: one for your existing mortgage and one for your new investment. This structure makes it easy to manage and track your debt while also giving you the benefit of a variable or fixed rate on your investment property loan.
Who Offers These Loans?
Now that we understand how you can unlock your home equity, let’s look at some of the banks and brokers that can help you make it happen.
Australia has a competitive market for property loans, with many banks and mortgage brokers offering services specifically designed for property investors. Here are a few that stand out:
Commonwealth Bank (CBA): One of Australia’s largest lenders, CBA offers refinancing and equity loans, making it easier for you to fund an investment property using your home’s equity. They also have an extensive network of property advisors to guide you through the process.
Westpac: Another big player in the Australian lending market, Westpac has several products designed for property investors, including their Equity Access Loan, which allows you to borrow against the value of your home.
Mortgage Brokers: While banks offer direct lending, mortgage brokers provide a broader range of options. Brokers such as Mortgage Choice and Aussie Home Loans specialise in helping homeowners navigate the complexities of using home equity for investment purposes. Mortgage brokers can also introduce you to more niche products, depending on your situation.
Working with a property advisor can be a game-changer if you’re unsure where to start. At EDA, our investment property advisors Melbourne can connect you with the best banks and brokers suited to your specific needs. Our team understands the intricacies of financing investment properties and can guide you through the steps with ease.
How Do People Successfully Use Equity for Investments?
The key to making this strategy work is understanding that your home equity is not “free money.” It’s a tool that can help you build wealth but comes with its own risks and responsibilities. Here’s how people use this to their advantage:
Start Small: Many successful investors begin by using equity to purchase a modest investment property. The goal is to get into the market early, use rental income to cover the mortgage, and benefit from long-term capital growth. As the value of the investment property grows, they can then use its equity to purchase more properties.
Long-Term View: Property investment isn’t about getting rich quickly. It’s about building wealth steadily over time. Using your equity to buy an investment property can provide rental income and tax benefits, but the real payoff comes when the value of your properties appreciates.
Cash Flow Management: Investors often work with a property advisor to make sure they’re not over-leveraging. Balancing mortgage payments, rental income, and ongoing property expenses is critical to maintaining a positive cash flow. A good investment property will not only cover its costs but generate surplus income over time.
What Should You Consider Before Taking the Plunge?
Before you leap into using your home equity to buy an investment property, there are a few things to consider:
Market Conditions: Property markets can fluctuate, so it’s essential to invest when the market is favourable. Working with investment property advisors Melbourne can help you pinpoint the best time to enter the market.
Your Financial Situation: Make sure you’ve got a solid handle on your financial situation before taking on more debt. Calculate the risks and make sure you have a buffer in case interest rates rise or rental income dips.
Investment Goals: Are you looking for short-term gains or long-term stability? Understanding your goals will help you choose the right property and finance options.
Final Thoughts
Using your home equity to purchase an investment property is a strategy that many Australian investors have used to build wealth. It’s a way to leverage the assets you already own to create new opportunities. Whether you’re looking to generate passive income, gain tax benefits, or plan for retirement, property investment can help you achieve these goals. If you’re not sure where to begin, EDA’s experienced investment property advisors Melbourne can guide you through every step of the process. Investing in property doesn’t have to be complicated—especially when you’ve got the right team by your side.
