Using home equity to purchase your next property
If you already have a home loan and have paid down some of the loan, you may be able to use your home equity to purchase another property.
What is home equity?
The equity in your home is the difference between the value of the property, and the loan amount you still have left to repay. For example, if your property is worth $1,000,000 and you still have a $600,000 loan, your home equity is $400,000. However, you can only borrow up to 80% of the property value. So your usable home equity would be:
$1,000,000 x 80% = $800,000
$800,000 - $600,000 = $200,000 in usable home equity
This $200,000 in equity could then be used as a deposit on another property, cover purchasing costs or to finance renovations.
How to release home equity from your existing loan
There are two key ways to release equity from your home:
Home loan top-up
Supplementary loan account
Cross-collateralisation
The key difference between these two options is whether your original property is put up as security for the new loan in addition to the new property you’re going to purchase.
Home loan top up
A home loan top up is the most common way of releasing equity from your home, and involves applying to increase your home loan limit with your existing lender, or applying for a new loan with a higher loan amount with a new lender (refinancing your existing home loan).
You will apply to have the amount you need for your new deposit released for your new loan (usually 20% of the value of the property you would like to purchase if you would like to avoid paying lender’s mortgage insurance).
In the example below, someone who has $250,000 in useable equity in their existing property could use this equity as a deposit to purchase a property worth $1,200,000 (keep in mind there are other costs associated with buying a property in addition to the deposit).
Existing Property
Property Value: $1,000,000
Loan Amount Remaining: $550,000
Total Home Equity: $450,000
Useable Equity (80% of property value): $250,000
New Property
Property Value: $1,200,000
Deposit Required: $240,000
Supplementary loan account
If you don’t want to increase your current home loan balance, another option is for you to use your equity to set up a new, supplementary loan account for the increase on your existing loan. This may allow you to choose different features or a different loan term than your current loan.
Cross-collateralisation
Cross-collateralisation involves having both your existing and new property under the same loan, leveraging the equity in your exiting property and using it as collateral for the new loan. The structure of security for a cross-collateralised loan is:
Original mortgage secured by existing property
New mortgage secured by existing property and investment property
One of the main advantages of cross-collateralisation is that you could get a lower owner occupied interest rate on your whole portfolio as opposed to a higher investment loan rate. You also may still be able to claim investment property tax deductions on the investment property portion of the loan.
It is important to note that having both securities tied up in one loan could make it more difficult to separate the properties. For example, if you decide to sell one of the properties, your lender might need to rewrite the loan for the property you’re not selling.
In the event of a market downturn, the value of your properties will be tied together. This means that even if only one of your properties decreases in value, and the other still has a capital gain, your overall equity will be affected instead of just the property that experienced the decrease, which could adversely affect your ability to borrow for any additional loans.
What do I need to consider before accessing my equity?
There are a few things that are important to consider when releasing or using your equity. Some of these include:
How much useable equity do you have in your existing property?
If your equity is not enough to cover deposit and purchase costs for the new property, do you have enough savings or other forms of finance to cover these costs?
Is it important to you to have the new loan with the same lender as your existing loan?
Do you want different features on your new loan than your existing loan?
How do you want to access your equity?
If you are unsure how to proceed, you can contact us via email, phone or social media to speak about your options to use equity to purchase your next property.
What do I need to do to access my equity?
The first step to accessing your equity is to speak to a mortgage broker like Unbroke about your goals and financial situation. Based on your situation and preferences around repayments, lenders, features and lenders a mortgage broker will work with you to find a loan that meets your needs.
