How to use equity for your next property purchase

Equity is a powerful financial tool that can help you achieve your property investment goals. By leveraging the equity in your current property, you can finance your next property purchase without having to save for a large deposit. Here’s how to use equity for your next property purchase effectively.

Understanding equity

Equity is the difference between the current market value of your property and the amount you owe on your mortgage. For example, if your property is valued at $800,000 and you owe $400,000 on your mortgage, you have $400,000 in equity.

Benefits of using equity

Using equity to finance your next property purchase offers several advantages:

• No need for a cash deposit: You can use the equity in your existing property as a deposit for your new property.
• Potential for tax benefits: If you’re buying an investment property, the interest on the loan used to purchase it may be tax-deductible.
• Leveraging growth: By using equity, you can leverage the growth of your existing property to invest in additional properties, potentially increasing your wealth.

Steps to use equity for your next property purchase

1. Calculate your available equity

The first step is to determine how much equity you have in your current property. Most lenders allow you to borrow up to 80% of your property’s value. To calculate your usable equity, use the following formula:

Usable Equity = (Property Value x 0.80) – Existing Loan

For example, if your property is valued at $800,000 and you owe $400,000, your usable equity would be:

($800,000 x 0.80) – $400,000 = $240,000

2. Get a property valuation

Before you can access your equity, your lender will require a formal property valuation. This valuation will determine the current market value of your property and, consequently, the amount of equity you can use.

3. Talk to your lender

Once you have an idea of your usable equity, contact your lender to discuss your options. Your lender will explain the different ways you can access your equity, such as a line of credit, home equity loan, or refinancing your mortgage.

4. Choose the right loan option

There are several ways to use your equity for your next property purchase:

• Line of credit: A line of credit allows you to borrow against the equity in your property as needed. You only pay interest on the amount you draw, making it a flexible option.
• Bridging loan: This is a separate loan that uses your equity as collateral. Funding is a pioneering Australian bridging loan lender; read about our short-term finance solutions at this link.
• Refinancing: Refinancing your mortgage involves taking out a new loan to pay off your existing mortgage and accessing additional funds based on your equity.

5. Get pre-approved

Getting pre-approved for your loan gives you a clear understanding of how much you can borrow and makes you a more attractive buyer to sellers. Your lender will assess your financial situation, including your income, expenses, and credit history, to determine your borrowing capacity.

6. Purchase your next property

With your financing in place, you can start searching for your next property. Be sure to consider factors such as location, potential for capital growth, rental yield, and your long-term investment goals.

Tips for using equity wisely

• Don’t overextend yourself: Only borrow what you can comfortably afford to repay. Overleveraging can lead to financial stress if property values decline or interest rates rise.
• Consider the costs: Remember to factor in the costs associated with purchasing a new property, such as stamp duty, legal fees, and ongoing maintenance costs.
• Consult with professionals: Seek advice from a financial advisor or mortgage broker to ensure you make informed decisions that align with your financial goals.

Example illustration

Let’s illustrate how to use equity with a practical example. Imagine you own a home worth $800,000, and you owe $400,000 on your mortgage. You have $400,000 in equity. You decide to use $240,000 of this equity as a deposit for a new investment property valued at $600,000.

By accessing your equity, you avoid the need for a cash deposit and can purchase the new property. You arrange for a bridging loan with Funding, giving you flexibility to draw funds as needed for the deposit and other associated costs.

By understanding how to use equity effectively, you can unlock the potential of your current property to finance your next purchase, helping you to build wealth and achieve your property investment goals.