Should You Use Equity to Buy an Investment Property?

One of the most powerful elements of property as an asset class is the fact that you can use leverage.
 
Not only are you able to access finance through a lender, such as a bank, who will lend you 80% or more of the value of the property, but you can also access the equity that has been created in other properties as well.
 
For example, if you purchased a property for $500,000 that increased in value to $700,000, then you’ve seen a $200,000 increase in equity.
 
Assuming that you initially contributed a 20% deposit which was $100,000, that means you’ve got a spare $100,000 of equity sitting in the property that you can use after it increased in value.
 
Equity is simply, the value of the property, less the outstanding debt you have on it - which is your mortgage.
 
By accessing the equity in your property, whether that’s your PPOR or another investment property, is how investors are able to buy multiple properties in a short space of time.
 
Equity is also valuable because you can also use it for other purposes as well. For example, you could use it to renovate your current property and increase value in that way or use it to assist with the costs involved in a subdivision.
 
What should you consider before accessing equity?The reality is that withdrawing equity to use elsewhere does add an element of risk.
 
It’s important to get advice from a professional such as a mortgage broker, before deciding to go down that path.
 
There are also some considerations that you will need to take into account.
 

1. When you buy your first property, you might be able to access very high LVRs. For first home buyers, this can be as high as 95% or even more in some instances. When you look to accessing equity in another property, most lenders will limit that to only 80%, to make sure they have a degree of comfort should market conditions change or your personal situation does.

 

1. If you are able to go above that 80% threshold, you would be looking at paying Lenders Mortgage Insurance (LMI), which can be a sizeable upfront cost.

 

1. You still need to be able to service the loan that you take out. Just because you have the equity available to you, a lender will still be assessing your financial situation and your ability to service any debts before they let you access any equity you have in other properties.

 
With interest rates at record low levels, and restrictions around lending being reduced by various Government bodies in recent years, getting finance is easier than it has been for a long time.
 
However, it is still very important to get the right advice before looking to access any equity you might have.
 
By using your equity, you are effectively increasing your leverage. This is a very powerful tool to jump into your next property far sooner than if you had to save up a deposit.


​See your home loan options in less than 5 minutes