Using equity to buy property is a popular method in Australia, allowing homeowners to leverage the value they’ve built up in their current home to purchase another property. Equity refers to the difference between the market value of your home and the balance of your mortgage.
When you use equity to buy property, you’re essentially borrowing against this value, which can help you fund a new home or investment without needing a large cash deposit.
In this article, we’ll break down how equity works, how much you can use, the benefits and risks, and the legal steps involved.
By the end, you’ll have a clear understanding of how using equity to buy property can be a powerful financial strategy, whether you’re looking to expand your property portfolio or purchase a new home.
I. What Does It Mean to Use Equity to Buy Property?
Equity is the difference between the value of your home and what you still owe on your mortgage. For example, if your home is worth $500,000 and you owe $200,000, your equity is $300,000. This equity can be a powerful tool when buying another property.
When you “use equity” to buy property, you are borrowing against the value of your current home. Essentially, your home acts as security for a new loan or an increase in your existing loan. You don’t have to sell your home to access this money—you’re simply using the value you’ve built up to help finance your next purchase.
Equity can be used for various purposes, including purchasing an investment property, a holiday home, or upgrading to a bigger house. However, before you jump in, it’s essential to fully understand how much equity you can use and the possible outcomes.
II. How Much Equity Can I Use to Buy Another Property?
While it may be tempting to assume you can use all the equity in your home, it’s not quite that simple. Lenders won’t allow you to borrow 100% of your equity. Instead, they typically let you access up to 80% of your home’s value without needing to pay Lenders Mortgage Insurance (LMI).
Using our earlier example, if your home is worth $500,000, a lender might allow you to borrow up to $400,000 (80% of the home’s value). If you owe $200,000 on your current mortgage, you could potentially access up to $200,000 in equity ($400,000 minus $200,000).
However, if you wish to borrow more than 80% of your property’s value, you’ll likely need to pay Lenders Mortgage Insurance, which can be expensive and add to your overall costs. It’s important to speak to your lender or a financial expert to figure out how much equity you can comfortably use.
III. What Are the Benefits and Risks of Using Equity for Property Investment?
Using equity to buy property offers many benefits, but it also comes with some risks. Let’s explore both sides.
Benefits:
No Need for a Cash Deposit: One of the main benefits is that you don’t need a large cash deposit to purchase your next property. Instead, you use the equity you’ve built in your current home.
Wealth Building: If the value of both your current and new properties rise over time, using equity can help grow your overall wealth.
Tax Advantages: If you’re buying an investment property, the interest on your loan may be tax-deductible, which can reduce your taxable income.
Better Loan Terms: Because you already have some skin in the game, lenders may be more likely to offer you better terms, such as lower interest rates.
Risks:
Higher Debt: When you use equity, you’re essentially increasing your total debt, which means you’ll have higher repayments to make. If you overextend yourself, it could become difficult to manage, especially if interest rates rise.
Property Market Fluctuations: While property values generally go up over time, there’s always the risk that the market could fall. If property prices drop, your equity could shrink or even disappear, making it harder to pay off your loans.
Impact on Future Borrowing: Using too much equity could affect your ability to borrow money for other things in the future, like renovations or emergency expenses.
Also Read: 7 Points to Include in Your Buying Property Checklist
IV. How Do I Access Equity in My Current Home?
There are several ways to access the equity in your home, depending on your financial situation and the policies of your lender.
Increase Your Current Loan: You can ask your current lender to increase your mortgage, allowing you to borrow against your equity. This is a straightforward option if you’re happy with your current lender’s terms.
Take Out a Line of Credit: A home equity line of credit (HELOC) allows you to borrow money as needed, up to a set limit, using your home as security. This flexible option is popular for those who want to access equity over time rather than all at once.
Refinance with a New Lender: If your current lender isn’t offering favourable terms, refinancing with a new lender could allow you to access your equity while also potentially securing a lower interest rate.
It’s important to compare all your options and understand the full costs involved, including fees and potential changes to your repayment amounts.
V. What Are the Legal Steps and Requirements When Using Equity for a New Property Purchase?
When using equity to buy property, there are specific legal steps and requirements to follow, particularly in Australia. Here’s what you need to consider:
Property Valuation: A lender will typically require a professional valuation of your property to confirm its current market value. This valuation is crucial because it determines how much equity you have available.
Loan Application: Once you know how much equity you can access, you’ll need to apply for a loan or mortgage increase. This application will require documentation like proof of income, a list of assets, and your current debt obligations.
Legal Documentation: A conveyancer or solicitor will help you handle the legal paperwork involved in transferring ownership or securing a loan. They will ensure that all contracts are properly drafted, reviewed, and signed.
Mortgage Agreement: If your application is approved, you’ll need to sign a new mortgage agreement. This agreement outlines the terms of your loan, including the amount of equity you’re using, the interest rate, and the repayment schedule.
Settlement Process: If you’re using equity to buy another property, a conveyancer will handle the settlement process, ensuring that the property transfer is legal and that all conditions of the contract are met.
A qualified conveyancer can make sure all the steps are completed correctly, avoiding potential issues that could delay or complicate the process.
Also Read: A Comprehensive Guide to Buying Land in QLD
Want More Control Over Your Finances? We Can Help
Using equity to buy property is a strategy that many Australians use to grow their property portfolio or move into a better home. However, it’s crucial to understand both the benefits and risks involved. Always make sure you’re borrowing within your means, and consult with experts, including a conveyancer, to ensure all legal requirements are met.
If you’re thinking about using equity to buy property, CJC Law can assist you with professional conveyancing services. We’ll help you navigate the legal steps, ensuring everything is done correctly and efficiently. Contact us today for expert guidance on your property purchase!
