Many people begin their property investment journey by unlocking the equity in their current home to use as a deposit for a second property. Here is how it works:
- Get Your Home Valued: The first step is to have your home appraised by your real-estate agent/bank valuation firm. For example, if your home is valued at $750,000.
- Calculate Your Equity: Equity is the difference between your home’s market value and your loan balance. For instance, if you owe $400,000, your equity would be $350,000.
- Determine Usable Equity: Lenders typically allow you to access up to 80% of your home’s value, minus your existing mortgage. In our example, 80% of $750,000 is $600,000. Subtracting your loan of $400,000 leaves you with $200,000 in usable equity.
- Leverage Your Equity for Investment: This equity can potentially be used as a deposit for an investment property.
How to Access Your Equity for Investment: To access your equity, you may need to refinance your current home or top up your existing loan. The bank will assess your eligibility based on factors like your income, existing debts, and your property’s value.
Once approved, the equity can be used for a deposit on a new investment property. You will then take out a new loan for the investment property, typically from the same lender. Over time, both properties may increase in value.
Example Breakdown:
- Current Home Loan: $400,000 (on a home valued at $750,000)
- Investment Property Price: $500,000
- Equity Released: $120,000 (used for a $100,000 deposit and $20,000 for fees like stamp duty)
- Remaining Loan for Investment Property: $400,000 (combined with $100,000 equity release for the full purchase)
- Total Property Value: $1,250,000 ($750,000 for your home + $500,000 for your investment property)
- Total Debts: $920,000 ($400,000 mortgage + $120,000 equity release + $400,000 investment loan)