Using Equity To Buy Another House – Investment Property Finance

Using equity to buy another house

Using equity to buy another house is something many homeowners dream about. But is owning an investment property beyond the reach of the average Australian? Is it only achievable for the top 1%? You may feel like you struggled and saved for years just to purchase your first home, so how on earth will you afford a second one?! If you feel like this, don’t give up! Using equity to buy an investment property may be more achievable than you think.

According to the latest statistics from the Australian Taxation Office (ATO), over 2.24 million Australians owned an investment property in 2020-2021. That’s around 1 in 5, or 20% of Australian taxpayers. So, owning an investment property is clearly an achievable goal. How do many achieve this? By using the equity in the current property to help finance their investment. 

BOOK AN APPOINTMENT

Using Equity to Buy Another House

What does using equity to buy an investment property involve? It’s when you leverage the value of a property you already own to help finance the purchase of a new one. This can be done when the balance of your existing home loan is less than the property’s current market value. Borrowing against the equity can help potential investors who wouldn’t otherwise have the savings needed to secure a second mortgage. Using equity to buy another house comes with potential risks and benefits, so homeowners need a clear understanding of what’s involved before going ahead with an investment purchase.  

Using Equity to Buy Another House – Understanding the Jargon

If you’ve started researching how to use equity to buy an investment property, you’ve probably already come across a lot of unfamiliar financial jargon. An accurate understanding of this terminology will be really beneficial if you decide to move ahead with accessing equity. Some of the most common terms you’ll come across are:

  • Equity: The portion of property ownership that is not covered by a home loan. In other words, the part you have paid off and now own outright.
  • Usable Equity: The portion of a property’s value that can be borrowed against. This is usually calculated by taking 80% of the overall value of the property and then subtracting the outstanding mortgage total.
  • Home Loan Refinance: When you replace an existing mortgage with a new one, often to secure better terms, rates or conditions. This can also be done to access equity.
  • Leveraging: When you use the existing property’s equity as collateral to secure a loan for purchasing an additional property.
  • Loan to Value Ratio (LVR): A calculation used by lenders. It represents the percentage of the loan amount compared to the property’s appraised value. The lower the LVR, the less risky the loan is considered by lenders.  
  • Capital Growth: The increase in a property’s value over time, which can boost the amount of equity you have.
  • Negative Gearing: When the costs of owning a rental property (maintenance, home loan interest, etc.) are more than the income generated by renting the property out.

 

How to Use Equity to Buy an Investment Property

using equity to buy another house

So, you want to use the equity in your current home to buy another house. How do you go about calculating how much equity you have?

Start by obtaining an accurate assessment of your property’s current market value. Then, deduct the balance of your existing home loan. The remaining value is your total equity. For example, if your home is valued at $750,000 and you owe $350,000 on your mortgage, that means your current equity amount is $400,000. Most lenders will then lend a percentage of that equity (the ‘usable equity’) to you, which you can put towards buying another property.

How Much Do I Need If I’m Using Equity to Buy Another House?

Using equity to buy another house is possible if you have enough of a ‘usable equity’ buffer. Generally, lenders are happy to lend up to 80% of a home’s value (that includes your current debt as well) without requiring Lenders Mortgage Insurance (LMI). This means your usable equity is 80% of your home’s current value, minus any existing debt.

With the numbers we used above, your usable equity would look like this:

  •  $750,000 (home value) x 80% = $600,000
  • $600,000 (80% of home value) – $350,000 (current mortgage balance) = $250,000

In this scenario, your usable equity would be calculated at $250,000.

How Much Can I Borrow If I’m Using Equity to Buy an Investment Property?

Similar to when you bought your first home, most banks are willing to lend up to 80% of your investment property’s value with a home loan. They may loan you more if you’re willing to pay for LMI.

Once you know how much usable equity you have in your current home, you can work out roughly how much you could borrow to secure an investment property. You can do this by multiplying your usable equity by 5. If we continue using the figures from the example above, the calculation will look like this:

  • $250,000 (usable equity) x 5 = $1,250,000

Using equity as a deposit in this scenario means with your usable equity of $250,000, you have a 20% deposit to find a home worth more than $1 million.

Your capacity to buy a $1 million property also needs to factor in costs of stamp duty, legal fees and other upfront costs, as well as your ability to make repayments. That’s why it’s important to speak to an experienced mortgage broker who can assist you in better understanding your financial situation.

How to Use Equity to Buy Additional Investment Properties

If you have a principal and interest home loan on your investment property it will gradually start building up equity too. Property values rising on both your owner-occupied home and your investment property will increase your overall equity. As you build usable equity across your two properties, you can potentially draw on it as leverage to purchase more investment properties in the future (if that is your goal).

Property wealth is impacted by market prices because that determines your home’s value (and therefore, usable equity). So, as markets rise, your property wealth grows, and each time it falls, your property wealth shrinks. If you are strategic with your real estate portfolio, you can use it to your advantage to achieve long-term wealth.

CHAT WITH A MORTGAGE BROKER

What are the Potential Risks of Using Equity to Buy Another House?

weighing the risks of using equity to buy another house

There are certain risks associated with using equity to buy an investment property. These include:

  • Market Volatility: Australia’s property market can be volatile. If there’s a market downturn, you could end up with multiple properties that are worth less than what you paid for them.
  • Interest Costs: Taking on a second home loan means you’ll be managing additional interest costs, which can lead to strain on your monthly budget.
  • Loan Approval: Securing approval for a second mortgage can be challenging because lending criteria is often quite strict.
  • Reduced Home Equity: Using the equity from your primary property can limit your ability to access it for other financial needs (such as future renovations) or emergencies.
  • Negative Gearing: If the new property doesn’t generate enough rental income to cover expenses, you may have to deal with negative gearing. While this can lead to tax deductions, it can also create financial stress.
  • Responsibilities: Owning multiple properties comes with added responsibilities. In addition to looking after your family home, you’ll also need to deal with property management, maintenance and any tenant issues.

While the above list may seem daunting, many of these risks can be managed by doing thorough research and consulting with experts before making a purchase.

What are the Advantages of Using Equity to Buy Another House?

There are significant advantages associated with using equity to buy an investment property. These include:

  • Leverage: Australia’s strong property market and consistent price growth make it an attractive environment for leveraging your existing property’s equity to purchase a new one.
  • Rental Income: You can generate consistent rental income from the new property, especially in high-demand areas. This can help to offset your expenses.
  • Tax Benefits: Home loan interest on the new property may be tax-deductible, potentially reducing your overall tax liability (talk to a financial consultant for more information on how an investment property will affect your tax).
  • Capital Growth: Historically, Australian property has seen steady capital growth. As a result, owning multiple properties can produce long-term financial benefits.
  • Diversification: Owning multiple properties in different regions (or investing in different types of real estate) can diversify your investments and reduce risk.

Using equity to buy an investment property carries the potential for substantial benefits. A mortgage broker with experience in investment loans can help you make the most of your assets to help you achieve your long-term financial goals.

Talk to a Mortgage Broker About How to Use Equity to Buy an Investment Property

Whatever your financial and property goals, talking to an experienced mortgage broker should always be your first step. This will help you to gain a better understanding of what is possible when using equity to buy an investment property. 

As experts in investment property mortgages, the team at Sunshine Coast Financial Solutions can guide you through the process of using equity to buy another house. Contact us today to book an appointment where you can find out more.

BOOK AN APPOINTMENT NOW

"*" indicates required fields

What our Clients Say

Sunshine Coast Financial Solutions - Mortgage BrokerExcellentSunshine Coast Financial Solutions - Mortgage Broker5.0 Based on 493 reviews fromSee all reviews review us onMatt Trist (Mainland251)Matt Trist (Mainland251) ★★★★★ What a treat it was to work with Chris and his team, they are extremely professional and we're able to find me a much better deal on my home loan. I'm now saving thousands each year! I couldn't recommend him highly enough 👍Katrina OwenKatrina Owen ★★★★★ Sunshine Coast Financial Solutions worked magic for this first home buyer. The home-buying process is very daunting for newcomers, when searching for your dream home it's hard to know the usual steps and who to trust. Chris and Adam from SC Financial Solutions provided professionalism and attention to detail each step of the way, helping to relieve stress and bring peace of mind knowing we were in safe hands throughout this life changing decision. I'll recommend SC Financial Solutions to everyone searching for an award-winning knowledgeable, reliable and responsive brokerage team.Jay WJay W ★★★★★ This new homeowner is thrilled to leave a review for Chris and his colleague Adam at Sunshine Coast Financial Solutions. These mortgage wizards worked their magic on a loan for me, comparing all leading banks of Australia, with a great result. Their efficiency and advice meant I could make a fast and easy settlement. Chris and his team have made our first home buying experience so much easier.If you need a mortgage, I couldn’t recommend enough🌞🏡 Sunshine Coast Financial Solutions 🌞🏡David MohiDavid Mohi ★★★★★ Heidi BlattnerHeidi Blattner ★★★★★ Excellent service, fast and efficient. I have been using the SCFS team for years and recommend them to anyone for finance solutions. You lean back and relax while they do the hard work and find you the best deal. Very happy 😊Jesse SkinnerJesse Skinner ★★★★★ Today is approval day something I did not think I would be doing in this day and age with how life has been but thanks to the team at SCFS it's all been made possible and easy couldn't recommend a greater team, will definitely be using them for my next few housesSarah FosterSarah Foster ★★★★★ I've been using Sunshine Coast Finance for a number of years over which time they have taken care of the finance for 3 properties, I can't recommend them enough.Mick & Amy LongMick & Amy Long ★★★★★ On behalf of my wife and I, We highly recommend Chris and his team for your financial needs. They made our process feel smooth and enjoyable, and we will definitely be returning in the future for their services.Kayla CochraneKayla Cochrane ★★★★★ My husband and I have worked with Daryl for a while now and the experience has been nothing but beyond exceptional. The work he puts in to help us is incredible. We would be lost without his expertise and guidance. We couldn’t recommend Sunshine Coast Financial Solutions more highly.Francesco PiccardoFrancesco Piccardo ★★★★★ It was the first time for me to buy a house. I really had no idea how complicated it is. The Sunshine Coast Financial Solutions team support was amazing; they took care of everything and negotiated a very convenient interest rate. The communication was also fantastic. Great result with a minimum effort. Highly recommendedJack HindsonJack Hindson ★★★★★ Mick SheardMick Sheard ★★★★★ Steve SmithSteve Smith ★★★★★ Tracey BrewsterTracey Brewster ★★★★★ Absolutely amazing service. From start to finish the communication was 100%. We were kept up to date throughout the entire process and always felt supported. Daryl was so easy to talk to, responded to every question we had and I cannot thank him enough, we really appreciate all that he did for us. I will not hesitate using their service again in the future and have passed on their details to friends! Thankyou again for everything!Ben BrewsterBen Brewster ★★★★★ Excellent professional and friendly service, excellent communication, kept us informed throughout process. Highly recommendSerena AndersonSerena Anderson ★★★★★ The team at scfs are awesome. Thank you so much for making my home refinance a breeze. I've been asked by few people now, how I got this so quickly. I said "my broker is the gun". Thank you so much Chris, Shanina, Adam, Daryl and Tracey, for all your hard work, and dealing with me. Definitely 5 stars👍Aimee BiceAimee Bice ★★★★★ I highly recommend Chris and his team @ SCF Solutions to anyone going through a divorce or any other life transition that involves financial decisions.Chris’s expertise, practical approach, and easy-going nature provided the clarity I needed to make informed decisions about my financial future. Chris’s open and honest manner empowered me with a strong understanding of my financial position and lending capability which eased the burden associated with the division of the matrimonial home. He treated me like a priority and provided valuable guidance and support every step of the way as I navigated through an emotionally challenging time.Communication during critical times in the process such as loan approval and settlement was outstanding, even when this fell over the Christmas/New Year period. Someone from his team was always available to answer any questions or concerns and provide reassurance when needed.Second time I have engaged Chris over the past 8 years, and I can proudly say I will remain a lifelong customer!If you want the best possible mortgage to suit your specific financial situation then you can’t go past Chris and his team.Jill EllisJill Ellis ★★★★★ Chris and his staff members are always very helpful and informative.Callum EllisCallum Ellis ★★★★★ Another brilliant experience with the SCFS team. Excellent from start to finish - thanks so much Chris and the team 👍Melissa FreemanMelissa Freeman ★★★★★ Excellent, thank youRyan76314Ryan76314 ★★★★★ My partner and I had Jo and Shanina from SCF help us with our home loan, everything was quick and effortless which is what we wanted. Highly recommend them!We also just had a 1 year review from Tracey and she ensured we were still getting the best rate :)AmyAmy ★★★★★ Chris and his team have helped me again to buy a property which was a stress free and quick process. I have complete trust in Chris and would highly recommend his business.BaykaiBaykai ★★★★★ Chris and the team have been very helpful throughout the process keeping me informed every step of the way.SCF saved me lots of money from my current loan and will keep an eye on it from now on.Well done teamDanica RizzoDanica Rizzo ★★★★★ Adam and the team made our process super easy and they were very helpful. Would definitely recommend them ☺️stacey angelidesstacey angelides ★★★★★ Chris and his team made financing our new home purchase a smooth process that left nothing to chance. With his support we were able to confidently bid on and secure our dream home and he made sure we had the very best deal we could achieve in record time.Chris coached us through each step and was always available to answer our questions and provide guidance when we needed it.Overall his team is professional, friendly, helpful and always approachable.We couldn't have achieved the result we did without his help and we would definitely use his services again.We can thoroughly recommend Sunshine Coats Financial Services and Chris Wilson to anyone looking to arrange their finance. You won't be disappointed!Tom PearceTom Pearce ★★★★★ Chris & the team have been fantastic from start to finish. Patient, professional & supportive throughout the whole property purchasing journey. They have gone above and beyond to help me into a property, I am very happy with my experience from start to finish. I can’t speak highly enough of their transparent and professional approach.Joy DyerJoy Dyer ★★★★★ Once again, Chris and the team at SCF have provided us with excellent service. They are professional, efficient and always available to answer questions and concerns. We would highly recommend them.Ersen TuzluErsen Tuzlu ★★★★★ I recently purchased my home using the SCF Solutions for my financial needs, and I must say that I had a fantastic experience. The person who handled all my transactions on my behalf, Daryl Hermann, was extremely meticulous and efficient. His attention to detail and promptness in completing all the necessary tasks left me truly grateful. I highly recommend SCF Solutions for anyone in need of financial services. Thank you, Daryl, and the entire team at SCF Solutions for your outstanding support!Alan MurrayAlan Murray ★★★★★ Chris and his team were absolutely fantastic.Clear and transparent from the start, SCF made the experience of buying our home seamless.Highly recommend SCF for your lending solutions.Craig JenkinsCraig Jenkins ★★★★★ So much thanks to Chris and the team at SCFS. We had a very difficult and compressed settlement subject to many finance extensions. The whole way through the journey the whole team were absolutely professional and got us into our new home.I Very highly recommend there services toAll.Your sincerelyCraig Jenkins & Katherine ThompsonJustin WijayaJustin Wijaya ★★★★★ Adam and the team at SCF have been fantastic in finalising my re-finance. Adam provided insightful knowledge on lenders that would be more suited to my situation and the best avenues to go forward with. He achieved my expected result within a really short timeframe. No question was too silly. Can’t recommend Adam enough.Amie FitzgeraldAmie Fitzgerald ★★★★★ The team were amazing to work with. They made the process so easy, kept us updated on the process and gave us multiple options to achieve our goals. Couldn’t recommend them enough!!Peter NotmanPeter Notman ★★★★★ Chris and the team make it so easy and hassle free. Cannot recommend them highly enough and wouldn't use anyone else apart from them.Candice ShippCandice Shipp ★★★★★ Chris is very professional and always does everything to help us out!Sonia LynchSonia Lynch ★★★★★ Chris and the team were fantastic in helping us get our mortgage for our first home in Australia. They helped us through the process and were supportive, attentive and helpful throughout the entire process. I would heartily recommend SCF!Elliot BakerElliot Baker ★★★★★ Chris was great to deal with, straight to the point and got what we needed done. Explains everything you need to know in detail.Extremely happy with the outcome 👌🏻Tony DavisTony Davis ★★★★★ I am a repeat client of Chris and his team. In every experience I have had has been 100% positive. Chris and his team do everything possible to make every step through the process explained and run smoothly. I highly recommend anyone looking to finance or refinance to talk to Sunshine Coast Financial Solutions.Sam McGuireSam McGuire ★★★★★ the scfs team were fantastic from start to finish in getting my new loan. Nothing was a problem for them. Getting everything sorted very fast. Very fast replies and always keeping you updated.I can't recommend daryl and the team enoughThanks againFleur BrennetFleur Brennet ★★★★★ Chris, Shanina and the rest of the team were so super helpful, understanding and really got the best rate for me! Not only that their communications were so clear, consistent and they were always available for help and advice! Would highly recommend to anyone!! Thank you team!!Daniel SwartDaniel Swart ★★★★★ SCFS have assisted us with brokerage a few of times now and Chris, Matt, Shanina and the team have been fantastic every time!Brooke ThomasBrooke Thomas ★★★★★ We recently worked with Chris and his exceptional team. The experience was nothing short of magical – the team worked seamlessly to navigate the complex world of mortgages. Their expertise and dedication made the entire process smooth, leaving us thoroughly impressed. I highly recommend this team for anyone in need of mortgage assistance.Jarryd duffyJarryd duffy ★★★★★ Another positive experience with Chris and the team. We won't go anywhere else after dealing with Sunshine Coast Financial. Honesty and transparency as always.Teagen AllisonTeagen Allison ★★★★★ A huge thank you to Chris and the team who helped us secure a loan in only 2 days.We sent the enquiry last Monday and by Wednesday had the approval.Chris and the team even managed to secure us a better interest rate.Incredible service as always. Hassle free and such an easy process.We cannot recommend enough.Matthew TerrillMatthew Terrill ★★★★★ Proactive and excellent to deal with, would recommend highly to anyone.CSCS ★★★★★ Daryl helped with refinancing my home loan. The whole process was quick, seamless and very professional. I would highly recommend SCFS for their services and diligent work.Simon RoperSimon Roper ★★★★★ Chris and his team are consummate professionals, with incredible knowledge of the finance industry. Found us the best deal quickly and had approval in record time. These guys are a must if you want finance without fuss. We cannot speak highly enough of this Company.Luke RyanLuke Ryan ★★★★★ Chris and his team went above and beyond. We were first time home buyers and knew nothing about mortgages and the purchasing process. The process was made simple and stress free by the SCFS team.We purchased a property just before Christmas and Chris & his team were prompt and efficient and worked hard to make sure everything got over the line before the holiday period hit.I can confidently recommend their services. The real bonus here is that this is all at no cost to the purchaser. I will be using SCFS for any future loans and recommend their services without hesitation. Get around it and give them a call.Janine JGJanine JG ★★★★★ Chris and all the team at Sunshine Coast financial solutions have been absolutely fantastic. I cannot fault their service, professionalism and assistance with all my financial needs when I was obtaining finance.. refinancing and buying land. I'm not savvy at all in the finance area so the staff were incredibly helpful and highly efficient at getting me all the information I needed and helped me to understand what I was doing. I highly recommend them to anyone who needs help in this area. Thanks to Shanina especially... You really know your stuff and I couldn't have done all of this without you.Emily HallEmily Hall ★★★★★ My partner and I recently worked with Daryl, Chris and the team at SFC solutions and I just have to rave about them! They made the whole mortgage process a breeze. From the moment I reached out, they were super responsive and attentive to all my questions. They really took the time to understand my financial situation and goals, which made me feel confident in their expertise. They guided me through each step, explaining everything in simple terms. I couldn't believe how smoothly everything went. Working with Daryl, Chris and the team took the stress of being first time buyers away. If you're in the market for a mortgage, I highly recommend giving them a call. They're the best!Sarah FairleySarah Fairley ★★★★★ The team were fantastic. We got an appt the next day and they started working on getting us finance straight away. Such good communication, so friendly and went the extra mile for us, definitely recommend!!js_loader