How to use your current property equity to buy another house

Millions of Aussies are sitting on a “gold mine” without realising it – and by accessing it they can make themselves even richer.

The majority of Australian property owners are sitting on a gold mine they can use to drive serious investment growth, and in many cases they don’t even realise it’s full potential.

Using the power of your property ‘equity’ can help you quickly increase your investments without needing to use one single dollar of savings, ultimately accelerating your asset building and wealth creation.

But it’s not without risk, and while this can be a really smart way to get ahead, you need to cover your bases before jumping in.

What is ‘equity’?

I’m going to start with the basics here, because most of the jargon and financial terminology can be confusing and overwhelming.

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Your property equity is simply the difference between the value of your property and the amount you owe. For example, if you own your own home with a value of $850,000, and owe $550,000 on your mortgage, your equity value would be $300,000 ($850,000 minus $550,000).

If you own more than one property, you can calculate your total property equity by adding the value of all properties less the combined value of the debt held against the properties.

How does equity release work?

In Australia, most banks are generally happy to lend up to 80 per cent of your total property equity value without asking too many questions, or without you needing to pay extra costs like lenders mortgage insurance (LMI).

This means that if you own property that has either increased in value, or where you’ve paid down a chunk of your mortgage (or both), you’re probably in a good position to be able to ‘unlock the equity’ of your property and use it to invest.

You could use the money in your current home to buy another property. Picture: NCA NewsWire/Gaye Gerard

The caveat here is that you need to be able to service the debt repayments on your mortgage, which is something the banks will look closely at before approving you for an equity release mortgage.

How do you invest with equity?

The most common equity release investment strategy is to buy property. Generally if you have a 20 per cent deposit plus the money to cover stamp duty and purchase costs you’re in a good position to buy.

If you have a good amount of equity you can effectively borrow the money to fund your 20 per cent property deposit plus costs, meaning you can buy another property almost immediately.

The next most common equity release investment strategy is to use your property equity to build a share portfolio. When you borrow to make any investment (including shares), the interest payments on this debt is generally tax deductible, meaning this strategy can help you invest more money faster and create tax deductions at the same time.

Again the caveat here in both cases is that the banks will look to make sure you can cover the mortgage repayments – but if you’re taking a sensible approach to growing your investments you should have really already made sure you can comfortably afford the cost of any investment.

What are the risks of using equity to invest?

Borrowing to invest can help to accelerate and amplify your investment gains, but on the flip side it can also increase your potential losses.

If you choose a bad investment that declines in value, you can even end up owing more than your investment is worth. And if you’re ever forced to sell your investment at the wrong time, you can end up in serious trouble.

Accessing equity comes with risks if you invest the money badly.

This means that when you borrow to invest, it’s extra important you have a rock solid plan. You should make sure you can afford your investment not only today with current interest rates and costs, but also stress test this to make sure you can cover things if your costs increase or the income on your investment is lower than expected (think rental vacancy etc).

The wrap

Using equity to invest can seriously accelerate your asset building and how quickly you get ahead, moving you closer to financial security and freedom. But it does come with risks that should be carefully managed.

If you’re seriously considering using equity to invest, take the time to map out your investment and how it fits with where things are at for you today and with any changes you’re expecting in your situation over time.

This way you’ll put yourself in a position to take smart, confident action and work towards the results you want from your investments.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, and Author of the Amazon Best Selling Book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben is putting on a series of free money education events in 2022 to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.