If you’ve paid off part of your mortgage or made improvements to your home that have increased its value, you may have equity that could be used to buy an investment property. Equity is the difference between your home’s current value and what you owe on your mortgage, and some lenders will allow you to tap into your home’s equity to use as collateral for a new loan. Done well, this type of property investment can yield excellent results, but it’s important you understand the risks too.

How to calculate equity

Equity is the difference between what your home is worth (the market value) and how much you owe on it (the mortgaged amount). To calculate your equity you’ll need to know the current market value of your property, and the best and most accurate way to determine your property’s value is with a property valuation.

Once you have a property valuation, subtract the amount you owe on all loans secured by your home from its appraised value to determine how much equity you have. Lenders will typically lend up to 80 per cent of the value of your home, less any debt you still owe against it. This is considered your useable equity. Some lenders may lend more than 80 per cent if you take out Lender’s Mortgage Insurance.

How to access equity

Accessing your equity is done in much the same way as a normal home loan, and starts with a meeting with your mortgage broker or lender to discuss your borrowing power and overall financial situation.

Even if you have enough equity in your existing home for a deposit, you’ll still need to show that you can repay the additional loan amount based on your current financial situation, so be prepared to present the required documents to show proof of your income and expenses.

How to use equity

There are a few ways you can use the equity in your home:

1. A deposit on an investment property: If you’re considering buying an investment property, you may be able to use the equity in your existing home to cover your deposit. Your lender will require a bank valuation to assess your property’s market value and determine your useable equity, and could release up to 80 per cent of your equity subject to serviceability.
2. To renovate or remodel your current home: To add value to your property or because of a change of your life circumstances, you may be thinking about using some of your equity to renovate your home – a new kitchen, bathroom addition, or a change to the current layout. Before releasing equity, your lender will require a valuation.

What to consider

Using your home’s equity to grow your property portfolio and your wealth is a smart move that can be financially rewarding. However, it’s important you’re also aware of the risks.

• Market changes – in particular a slump - could impact your property’s value and your overall equity.
• Investment properties come with extra costs such as maintenance, fees and levies that need to be factored in to your investment.
• A change to your circumstances – such as job loss, injury or illness – could affect your ability to repay your additional mortgage.

Before making any decisions about accessing the equity in your property, it’s worth booking in a financial review with your mortgage broker. At Mortgage Express, the team of mortgage brokers have access to financial tools that can provide important insight into your property’s value, and can connect you with our Harcourts’ team for full appraisals. Contact Mortgage Express today to find out more.

While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.

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