How to Use Home Equity to Buy an Investment Property?

If you already own a home, it is possible for you to use the equity in your home to buy an investment property without dipping into your savings. You don’t have to put any physical cash towards the deposit. It is a popular and smart way to build your investment portfolio without feeling the pinch. 

Whether you want to own a holiday house on the coast or an investment property to rent out, you first need to know how to calculate and use your home equity to be a savvy investor. 

Here is a step-by-step guide to help you get started.

1.  Calculate Available Home Equity

Your home equity is the difference between the current market value of your property and the remaining debt on your home loan. For example, if Jack’s home is worth $600,000 and the current debt on his home loan is $450,000, then he has $150,000 worth of equity in his house.

Your Current Home Market Value - Remaining Debt on Your Home = Available Home Equity 

$600,000 - $450,000 = $150,000

Your home equity can build up over time as your loan amount decreases with principal and interest payments, and if the market value of your home increases with time. 

If you own a home for years and have been doing monthly loan payments, there is a most probable chance that you have built up your equity in your home. You can use your equity as security with lenders.

2. Workout ‘Usable Home Equity’

Usable equity is the equity in your home that you can actually access and use as a security to borrow. Usable equity is usually equal to 80% of your available equity. In other words, usable equity is equal to 80% of your property’s current value minus the remaining debt on your home. 

Usable Home Equity= (Your Current Home Market Value - Remaining Debt on Your Home) x 0.8 

Usable (Accessible) Home Equity = 80% of Available Home Equity 

Let’s understand this from the above given example.

As you know, Jack’s home current market value is $600,000 and he has a remaining loan of $450,000 on his home. 

$600,000 - $450,000 = $150,000 = Available Home Equity

$150,000 x 0.8 = $120,000 = Usable Home Equity

So Jack’s usable (accessible) home equity is $120,000.

Not sure how much home equity do you have? Use our home equity calculator to get an estimate.

3. Estimate Property Value And 

If you want to get a rough estimate of what you can afford to buy by leveraging your equity, this is how you should do it. This will also give you an idea of how much you need to borrow to buy your dream investment property.

Usable Home Equity x 4 = Property Market Value You can Afford to Buy

Lenders usually use the ‘rule of four’ (multiplying your usable equity by 4) to estimate your property market value, but if you add purchase costs such as stamp duty, legal fees, and more – the total sum needed to buy your investment property becomes equal to the price you get if you multiple your usable equity by 5.

Usable Home Equity x 5 = Investment Property Market Value (Including purchase costs)

For example: if you have usable home equity of $200,000, you can buy $1,000,000 worth of an investment property.

$200,000 x 5 = $1,000,000

You can buy your investment property with a 20% deposit of $1,000,000 (Property Market Value) and avoid lenders’ Mortgage Insurance (LMI). A lender will lend you up to 80% of your investment property’s market value. 

20% deposit of 1,000,000 = $200,000 Deposit amount

80% of 1,000,000 = $800,000 Loan amount 

You can also buy an investment property with a deposit lower than 20% but in this case, you’ll have to take out lenders’ Mortgage Insurance (LMI) as well. Meaning, you’ll have to pay an additional fee of approx. (2-3% of the loan amount) and may have to pay a higher interest rate as well.  

Book a free consultation with us and our lending expert will walk you through the possibilities when it comes to using your home equity to buy an investment property.  

4. Review Your Loan Options

It’s time to start researching and assessing lenders out there willing to give you a loan against your usable home equity. You can also use an online mortgage platform to compare and evaluate multiple options suited to your specific circumstances. It’s important to compare loan options beyond headline rates so you can get yourself a better deal. 

Talking to a mortgage broker is also a good way to approach this because a mortgage broker can do a “health check” on your current home loan, suggest you best practices to use your home equity and present the best lending options available in the market based on factors such as interest rates, fees and features.

Here at NG Loans, we are happy to help. You can schedule a free consultation session with our mortgage brokers today and they will help you review your loan options.

5. Evaluate Costs for Accessing Equity

The loan option you choose and the amount of access equity in your home will result in various fees and costs. For example, if you don’t have a %20 deposit of your investment property’s market value, you’ll likely need to pay Lenders’ Mortgage Insurance (LMI). Plus, there are various costs and fees involved in getting on board with a new lender, e.g. application fee, government fee, valuation fee, and more.

Mortgage Brokers at NG Loans can go through all expenses associated with accessing your home equity and getting on board with a lender. Additionally, they can help you avoid some costs or at least suggest the best solutions to minimize them. Talk to our experts today.

6. Loan Application and Settlement

Once you’ve decided on a loan option, it’s time to submit your application. You can submit the loan application yourself online by submitting your financial, personal, loan, and property information. Otherwise, taking help from a Mortgage choice broker makes your application process smooth and you get support at every step to the settlement.

Planning to buy an investment property using home equity? Contact us and our equity mortgage experts will tell you exactly how to go about it.