Home Equity and Its Role in Property Investment

Property investment has long been a proven and effective strategy for building wealth, and using home equity to buy an investment property can be an accessible way to enter the market. By leveraging the difference between your home’s current value and the amount still owing on its loan, you can kickstart your investment journey and even sidestep Lenders Mortgage Insurance.

What Is Home Equity

Equity is the difference between your property’s current-day value and the amount still owing on your home loan. You don’t need a Home Equity Calculator to figure it out either; If your home is valued at $800,000 and you have $600,000 owing on your home loan, your home’s equity is $200,000.

Equity builds over time in two ways: as your property grows in value and as you repay your home loan, meaning that, assuming you meet mortgage repayments and your home grows in value, your equity will only increase with time.

Building Home Equity

To build equity, you effectively need to widen the gap between your property’s value and how much you owe on your loan. This can be done by

• Adding value to your existing home, and
• Reducing the amount you owe on your home.

Both will typically happen naturally, as properties – particularly homes- tend to trend upwards in value over time, and as you make regular rental repayments, your home loan will go down. There are ways to generate greater equity. Such as

• renovations or improvements to your home. You can dip into your equity to make improvements to your home, but make sure the equity gained is worth the cost of the improvements.
• Making larger, or more frequent, repayments. By switching to fortnightly repayments, you may pay off a little extra each year. Why? There are 12 months in a year, but there are 26 fortnights.

What Can I Use Equity For?

You can take advantage ofusable equity (Which is 80% of your property’s value minus the amount owing on your loan)  in several ways related to your existing property

• Renovating or making improvements to your home that add value to the property.
• Putting down a deposit on a new home if you’re planning to move.
• Putting a deposit down on an investment property.

This can be an excellent way to start building a property portfolio, as it means you may be able to buy your second property, without having to save separately for a 20% deposit and while still avoiding Lenders Mortgage Insurance.

Using Home Equity to Buy an Investment Property

Once again, if your home is valued at $800,000 and you still have $600,000 owing on it, your equity is $200,000. You can use 80% of this equity, meaning you can put up to $160,000 down as a deposit on your investment property. This would outright cover a deposit on an investment property that costs the same as your home, $800,000. Keep in mind you’ll still have to account for all the regular costs associated with purchasing a home.

If you’re looking to start building a property investment portfolio, the first step is reaching out to your local MoneyQuest finance specialist. We can assess your finances and provide you with a plan to suit your needs, finances, and goals. So, reach out today!

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