Unlocking your home equity for a second property
Why equity can be your secret deposit
Many Australian homeowners do not realise that the value hidden in their bricks and mortar can act as a springboard into the investment market. Instead of saving for years, you can draw on the capital growth already earned by your first property and position yourself as a buyer sooner.
What lenders call usable equity
Equity is the difference between your property’s market price and the amount still owed on the loan. Lenders will generally let you borrow against up to eighty percent of that value, then subtract the existing balance. The figure you are left with is your usable equity and it can be treated like the deposit on a second purchase.
- Borrowing against equity can remove the need for a cash deposit.
- It may free up cash flow because you avoid lenders mortgage insurance by keeping the loan to value ratio under eighty percent.
- You may also secure sharper interest rates, as the equity acts as extra security for the bank.
A clear path from idea to keys in hand
- Calculate current equity by ordering a bank or independent valuation.
- Speak with your lender or broker to test your borrowing capacity, remembering that rent from the future property can sometimes be included.
- Choose a loan structure. Options include a top up on the existing mortgage or a separate facility that sits alongside the original loan.
- Select the investment. Aim for areas with diverse employment and low vacancy so the rent supports repayments.
- Submit the application, supply documents and let settlement proceed.
Case study: Sarah from Newcastle
Sarah purchased her first home for six hundred thousand dollars five years ago. It is now valued at eight hundred thousand and her loan balance has fallen to four hundred and fifty thousand. Eighty percent of the value is six hundred and forty thousand. After subtracting the balance she has one hundred and ninety thousand in usable equity. Sarah refinances, draws ninety thousand as a deposit and secures a two bedroom unit in Brisbane while keeping her original residence.
Understanding the risks
Equity is still borrowed money, so repayments rise. Make room in your budget for rate increases, unexpected maintenance and potential vacancy. If property values retreat, high leverage could leave you owing more than the combined properties are worth.
Five smart tips for confident investors
- Review recent sales in your suburb every six months to keep an eye on your equity position.
- Maintain a safety buffer in an offset account for peace of mind.
- Consider professional property management to protect rental income.
- Claim allowable tax deductions to boost after tax return.
- Update your insurance coverage to include landlord protection.
Frequently Asked Questions
How to leverage home equity for a second property in Australia?
Order a valuation, calculate eighty percent of that figure, subtract the current loan balance, then speak with a broker about a top up or separate loan that uses the equity as your deposit.
Is it possible to buy a second property with no cash deposit?
Yes, many Australians unlock usable equity and combine it with a refined borrowing strategy, meaning no out of pocket deposit is required, although normal purchase costs like stamp duty still apply.
What are common tips when using mortgage equity to buy an investment property in Australia?
Keep the total loan to value ratio below eighty percent, allow for rate rises, choose areas with consistent demand and always seek personalised financial advice.
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