The Australian real estate market is an extremely popular avenue for investors looking to build their wealth and achieve their financial goals.
Of course, part of building a successful investment portfolio involves understanding the many different strategies available to maximise your returns and expand your portfolio over time.
One such strategy to achieve this is to leverage the equity
you have in your existing property to help grow your portfolio much quicker.
In this quick guide, we’re going to take a deep dive into the investment game-changer that is equity.
We’ll explain:
- what equity is,
- how you can calculate your equity, and most importantly,
- how you can leverage equity to buy an investment property and continue boosting your wealth.
So, whether you’re a first-time investor looking to make your move into the property market, or you already own a property and are looking to secure additional investment property financing, this guide to leveraging property equity is for you.
What is equity?
In the context of the Australian investment property market, we often hear the term “equity” being thrown around – yet many don’t fully understand what it means.
Essentially, equity refers to the difference between
the value of your property and how much you still owe
on the property as part of your home loan.
In other words, how much of your home you actually own.
What is the significance of equity in an investment property?
When building a property portfolio, many smart investors leverage equity to help them expand their investments faster than would typically be possible using savings alone.
They do this by using the equity they have in their property to refinance or secure an additional home loan or line of credit to buy another investment property.
It’s important to note that equity is not a static number
Rather, the amount of equity you may have in a property is constantly changing.
For example, as you pay off your mortgage, your equity increases. Likewise, as your property increases in value over time, your equity increases then as well.
Let’s see how you can determine how much equity you have.
How do you calculate equity in your home?
The formula used to calculate equity in your home is quite simple. But first, you need to know how much your property is currently worth.
To do this, you can either have your property valued or find the median property value for the suburb to get a rough indication.
Next, figure out how much of your mortgage you still have left to pay back. From there, the rest is easy:
Equity = Current Property Value – Outstanding Loan Balance.
Consider this example
If your property is currently worth $1,000,000 and you still owe $550,000 on your home loan, then your property equity is the difference between the two.
Therefore, in this example, your equity would be $450,000.
You can then take a certain percentage of this $450,000 (depending on your lender and loan structure) to use as equity to buy a second home.
How to leverage equity to buy an investment property
If you want to leverage equity to secure investment property financing, there are typically two ways to go about it.
You can either refinance your existing loan to unlock part of your equity, or you can use your equity as security to get a home equity loan or line of credit.
Let’s break these down for you:
Refinancing your home loan to access your equity
Essentially, refinancing means obtaining a new home loan to replace your existing one, allowing you to unlock and use equity as a deposit for another investment property.
Here’s an example:
Let’s take the $1,000,000 property from earlier that you still owe $550,000 on.
Some lenders may be willing to let you refinance up to 80% of the current value of your property, meaning you can then use the difference between this 80% ($800,000) and what you still owe ($550,000) as equity to put down a deposit on a new investment.
$800,000 – $550,000 = $250,000
After refinancing, you now have $250,000 in equity to use as a deposit.
Obtaining a home equity loan to buy another property
Rather than refinancing, some lenders may offer you a home equity loan or line of credit.
This is where you use your existing equity as collateral to secure the new loan, and then use these funds or line of credit to buy another investment property – only paying interest on the amount you use.
Of course, each of these avenues comes with its own set of advantages and risks, and the best option for you will depend on your individual situation.
As an example, it’s important to be confident that you can comfortably make the additional repayments when securing a home equity loan.
You also need to be mindful of buying an investment property with equity, because if property prices fall dramatically, you could find yourself in negative equity and repaying a loan that’s more than the value of your property.
If you do want to leverage equity, the best thing to do is to talk to an expert in property investing and financing to get the right advice.
How to manage risk when looking to leverage equity
Of course, each of these avenues above comes with its own set of advantages and risks, and the best option for you will depend on your individual situation.
As an example, it’s important to be confident that you can comfortably make the additional repayments when securing a home equity loan.
You also need to be mindful of buying an investment property with equity, because if property prices fall dramatically, you could find yourself in negative equity and repaying a loan that’s more than the value of your property.
That’s why, before making any decision to leverage equity, you should ensure you’re financially capable of managing unforeseen changes in the property market, whether that’s a change in property prices, a rise in interest rates or any other potential changes that may impact your situation over time.
If you do want to leverage equity, the best thing to do is to talk to an expert in property investing and financing to get the right advice first.
Simple strategies to maximise your equity
There are several ways to maximise the equity in your property to help you expand your portfolio and reach your investment goals sooner:
Make additional repayments on your home loan
Paying off your mortgage balance faster than required is a great way to boost your equity.
Renovate your property
Renovations can drastically improve the value of your property, sometimes well beyond the cost of the renovation itself. This, in turn, will increase your equity.
Purchase an investment property in a growing or high-demand area
You can take advantage of demand by investing in suburbs with huge growth potential. This can often lead to decent increases in property value and boost your ability to leverage equity for an investment property in a shorter time frame.
Adopting these strategies into your overall investment plan, in line with your overall investment goals, can be a great way to accelerate your financial freedom.
Leverage equity to unlock your investment potential
As you can see, using equity to buy a second home can be one of the best ways to achieve success in the Australian investment property market.
Now that you understand what equity is, how to calculate it, and the different ways you can leverage equity to buy a second home, it’s time to figure out exactly how you can use equity to your advantage in your own investment strategy.
Of course, when making decisions such as these, it always helps to speak to an expert in property investing to get the professional guidance you need to truly succeed.
Do you need help to leverage equity and expand your investment portfolio?
At inSynergy, our expert team is here to help you.
inSynergy is a full-service and specialist Property Investment Advisory firm dedicated to helping you learn how to use property investment and finance as a tool to build a more secure future.
We provide our clients with a broad range of professional services designed to assist with all aspects of property investment, including property investment education, property investment strategy, finance and mortgage broking, and sourcing high-growth investment properties.
Through every interaction with you, our focus is on helping you to safely build a successful property portfolio and achieve your financial goals without sacrificing your lifestyle.
Get in touch with us today to discover how inSynergy can help you on your investment journey.
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Please note, that this article and the information in it is general and not to be considered as financial advice. However, you can book a meeting with us for personalised advice tailored specifically to you