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A rising property value does not automatically mean you can borrow the full amount of the increase. Lenders assess the property, your income, existing debts and servicing position.
When people search for use home equity to buy an investment property, they are usually looking for more than a generic explanation. They want to know what the finance process could look like, what might affect their options and what they should do before committing to a property or changing an existing loan.
What is home equity?
Equity is broadly the difference between the value of a property and the amount owing against it. However, the amount of equity shown on paper is not necessarily the amount you can access.
Lenders generally consider loan-to-value ratios, property valuation, income, expenses and existing commitments when assessing a request for additional lending.
That is why an equity conversation should include both the property and the borrower’s overall financial position.
Usable equity is not the same as total equity
A lender may allow borrowing up to a particular loan-to-value ratio, subject to its policy. The amount above your existing mortgage and below that limit is often described as usable equity.
For example, a property could be worth $900,000 with a $500,000 mortgage, giving $400,000 of gross equity. That does not mean $400,000 is automatically available to borrow.
The actual amount depends on valuation, lender policy and servicing.
Common reasons homeowners access equity
Homeowners may investigate equity for an investment property deposit, renovations, another property purchase or other legitimate financial purposes.
If equity is used to fund an investment, the loan structure and purpose of each split should be considered carefully. Your accountant or tax adviser can advise on tax treatment.
The key is to borrow for a defined purpose and make sure the additional debt is affordable.
Equity is a funding tool, not free money
Accessing equity increases debt. The additional borrowing still has to be repaid and the property may remain security for the loan.
Before releasing equity, work out exactly what the funds are for and how the additional debt will be serviced.
If the purpose is an investment property, keep the loan purposes and records clear and speak with your accountant about the tax implications.
How LJ Mortgages & Finance can help
At LJ Mortgages & Finance, the starting point is understanding your circumstances and what you are trying to achieve. From there, we can compare lending options across our panel and help you work through the application process.
Whether you are a first home buyer, an existing homeowner looking to refinance, an investor considering your next property or a homeowner reviewing multiple debts, the right starting point is a clear assessment of your position.
If you are ready to understand your options, get in touch with LJ Mortgages & Finance and arrange a conversation about your home loan or finance needs.
Frequently asked questions
How is home equity calculated?
Broadly, equity is the property value less the amount owing. Usable equity is a separate concept because lenders apply loan-to-value limits and servicing requirements.
Can I use home equity to buy an investment property?
Potentially. Equity can form part of the deposit or funding strategy, subject to borrowing capacity and lender criteria.
Does accessing equity increase my mortgage?
Yes. Releasing equity generally involves additional borrowing, which increases your debt and repayments.
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Read more about buying your first investment property here.
