If you’re considering buying another property, either as an investment or a holiday home, your existing home might hold the key. Once you’ve paid off a good portion of your home loan, or your property’s value has increased, you may be able to access your equity to buy a second property. Find out what you need to know about equity, how to use equity to buy another property, and how to calculate your equity.

What is equity?

Equity is the difference between the current market value of your property and your outstanding mortgage balance. Essentially, it represents the portion of the property that you truly own. Equity grows as you pay off your mortgage and your property value appreciates.

Here’s a simple example to explain:

John and Sarah bought their first home in Australia five years ago for $500,000. They paid a $100,000 deposit, leaving a $400,000 mortgage and $100,000 in equity.

Over time, as they made regular mortgage repayments, the real estate market also saw their property value increase.

Now, five years later, their home is worth $700,000 and their mortgage has reduced to $350,000

To calculate their equity, subtract their mortgage from their home’s value:

$700,000 (current value) – $350,000 (mortgage) = $350,000

John and Sarah potentially have $350,000 in equity which they could use as security to buy an investment property or a holiday home.

How can you access equity?

There are three ways you can access equity to buy a second home:

• Home Equity Loan: A home equity loan allows you to borrow against the equity you have in your existing home and pay it back at a fixed interest rate. Technically, home equity loans are second home loans, which means you’ll need to cover the additional loan repayments on top of your existing mortgage repayments.
• Home Equity Line of Credit (HELOC): A Home Equity Line of Credit is a revolving line of credit secured by the equity in your home. You can borrow money when you need it, repay it and then borrow again up to your approved credit limit. Interest is charged only on the amount you borrow and rates can be variable, meaning they fluctuate with market interest rates.
• Refinancing: A third option is to refinance your existing home for a higher amount than your existing balance and cash-out the difference to use to buy a second home.

To access any of these options, you’ll need to have sufficient equity in your existing home and meet lenders’ requirements for minimum equity and credit score.

Lenders generally only allow you to borrow up to 80% of the property’s value (this is called “usable equity”). Which means you’ll need at least 20% of the property’s value as equity retained.

If you borrow more than 80% of the property’s value (meaning you have less than 20% equity), you’ll likely need to pay Lenders Mortgage Insurance (LMI), a one-off fee charged by lenders to cover the risk of lending a high percentage of the property’s value.

Accessing your equity will also increase how much you owe as well as the interest charged, which means your home loan repayments will likely increase.

Turn your home equity into an investment opportunity

Get ready to turn your home equity into an investment opportunity. Speak to a Oshin Home Loans Broker today to explore your options and find the right financing solution to achieve your property goals.