Simply put, your home equity is the difference between your property’s current market value and the remaining balance on your mortgage.
Example: If your home is worth $800,000 and your mortgage balance is $500,000, you have $300,000 in total equity.
How much equity can I actually use?
While you might have $300,000 in total equity, lenders won’t let you withdraw all of it. To maintain a safety buffer, most banks generally allow you to borrow up to 80% of your property’s value (to avoid Lenders Mortgage Insurance).
The amount remaining after subtracting your existing loan from that 80% limit is your “usable equity”.
The math:
- Property Value: $800,000
- 80% Limit: $640,000
- Minus Current Debt: $500,000
- Usable Equity: $140,000
In this scenario, you could potentially access $140,000 to use as a deposit for your next purchase.
The benefits of using equity
- Preserve your savings: You can enter the investment market without draining your personal emergency funds or cash savings.
- Accelerated wealth building: By using leverage, you can control a larger asset (the investment property) which has the potential for long-term capital growth and rental income.
- Potential tax advantages: Interest on a loan used specifically for investment purposes is often tax-deductible. Always consult with a qualified tax professional regarding your specific situation.
Risks to consider
- Increased debt: Accessing equity means a higher total loan balance, which results in higher interest costs and monthly repayments.
- Market fluctuations: If property values decrease, your equity position shrinks. In extreme cases, this can lead to “negative equity”.
- Serviceability limits: Having equity is only half the battle. Lenders will also assess your income to ensure you can afford the repayments on a larger loan.
How to access the funds
There are several ways to “tap into” your equity, depending on your goals:
- Refinancing or Restructuring: You can increase your current loan or move to a new lender to “top up” your borrowing.
- Revolving Credit: This acts like a large, secured overdraft. You only pay interest on what you use, making it a flexible way to pay for deposits or renovations. However, because these usually have floating interest rates, they require discipline to manage.
- Lump Sum Repayments: If you have a floating or variable loan, you can often pay down the debt faster to “re-build” equity for future use. Fixed-rate loans may have restrictions on this, so check your terms first.
Your next steps
Using equity is a strategic move that requires a clear plan. The process generally looks like this:
- Talk to a Mortgage Adviser: A Loan Market adviser can help you calculate your exact usable equity and determine your serviceability—how much a bank is actually willing to lend you based on your income.
- Get pre-approval: Once we know your budget, we’ll help you secure a pre-approval so you can shop for an investment property with confidence.
- Find the property: With your deposit sorted via equity, you can move forward with the purchase just like a standard home buyer.
Don’t let your hard-earned equity sit idle. Whether you’re looking to buy your first investment or grow an existing portfolio, a Loan Market adviser can help you navigate the numbers and find the right structure for your goals.
