How To Use The Equity In Your Home To Purchase An Investment Property

If you already own a home chances are you may have built up equity over time. Equity is the difference between the current value of your property and the amount you owe on your mortgage. Leveraging this equity can be a powerful strategy for financing a rental property. 

There are two ways to build your equity.

- The value in your home increases, either through market changes and/or home improvements.

- By paying off the amount you’ve borrowed or by reducing the borrowing limit of your home loan over time. 

It’s important to note that the bank won't let you use all of the equity you have available, they will usually only lend to a maximum of 80% of your property's value. 

That's why it's essential to work closely with your Mortgage Adviser to explore the best options for leveraging your equity effectively and structuring it correctly.

Deposit Requirements for Rental Properties

When purchasing a rental property, the banks generally require a significant deposit. While the exact amount may vary and can change with updated bank rules, you will need at least 30% of the property's purchase price.  However, if you are buying a new build, you will need a minimum deposit of 20% of the property's purchase price. 

Loan Options

The way to turn equity in your home into “cash” for a deposit on a rental property, is by topping up and borrowing against your home.

The second part of this is to get pre-approved for the balance of the purchase price before you go shopping. This may come from a different lender in order to spread your risk across different banks i.e not having the rental property cross securitised with your home.

Let's look at an example to simplify things:

Your home is worth $1,000,000

You already have a mortgage of$550,000

Therefore, you have equity of$450,000

If all the figures stack up in terms of serviceability, the bank will most likely allow you to borrow up to 80% of your home's value, which in this example would be $800,000 (80% of $1,000,000). 

Given that you already owe $550,000 on the mortgage you will have what we call “usable equity” of $250,000 to use to fund the deposit on a rental property,($800,000 - $550,000 =$250,000).  

As you will require a deposit of at least 35% on the new rental, you could possibly purchase something for up to $700,000 with a deposit of around $245,000. This would also leave you with a bit of a buffer to pay for things like building inspections, legal fees and any minor cosmetic touch ups required on the property before you rent it out. 

All of this of course assumes that you can actually afford to service this level of borrowing. Working closely with your Mortgage Adviser can help you work out the best strategy for buying a rental property and make sure you are set up correctly from the start so you can keep growing your property portfolio.

Separating Your Properties Across Different Lenders

It’s a good idea to use different lenders for each of your homes if you are able to as it provides you with flexibility as the lending market changes and spreads your risk.  

If you have multiple properties and mortgages with one lender and you decide to sell one of those properties, the lender may require a complete review of your entire portfolio. This review will be based on the current bank criteria and policies, so if the lender's credit requirements have changed since you took out the original mortgages, they may demand a larger repayment from the proceeds of the sale 

If you are intending on growing your property portfolio make sure to get this set up correctly in the first place to avoid unnecessary stress.

What if You Want To Upgrade To A New Home And Keep Your Old One As A Rental?  

In the current market I have had clients take the opportunity to upgrade to a new home and keep their existing home as a rental property. 

The hurdle that most people run into is that once the bank is advised that your current home will be turning into an investment property, they restrict the loan-to-value ratio (LVR) to 65%- meaning that the lending on that property can not exceed 65% of the property's value.

This can make things difficult when you are looking to use equity in your existing property to buy your new home and can put a dampener on the journey to getting into your next home if you don't set things up properly beforehand.

It's important to get the right advice from the moment you are thinking about this scenario. As a Mortgage Adviser has access to specialist lenders that embrace these situations and don't restrict you from using your equity in this way.

So as you can see, financing a rental property requires careful planning, research and expert guidance. By understanding the deposit requirements, leveraging equity and exploring different loan options, you can maximise your returns and achieve long-term financial success.

With the right approach and support, property investment can be a rewarding and profitable experience.

As always, talking to your trusted Mortgage Adviser is the best place to start.

I can help you navigate the way, so get in touch today!

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