Can I Use the Equity in My Home as a Deposit?

Table of Contents

• Understanding Home Equity
  • Using Equity as a Deposit
  • Benefits and Considerations
  • Example Scenario
• Conclusion

Understanding Home Equity

Equity is the difference between your property’s current market value and the outstanding balance on your mortgage. For example, if your property is valued at $900,000 and you owe $700,000 on your mortgage, you have $200,000 in equity.

Using Equity as a Deposit

You can typically borrow against your home equity to use as a deposit for purchasing an investment property. Here’s how it works:

1. Calculate Your Usable Equity: Lenders generally allow you to borrow up to 80% of your property’s value without incurring Lenders Mortgage Insurance (LMI).

   • Example: If your home is worth $550,000 and you owe $300,000, 80% of the value is $440,000. Subtracting your current mortgage leaves you with $140,000 usable equity.

2. Investment Strategy: You can use this equity as a deposit for your investment property. Your home equity and anticipated rental income can help you secure the financing needed.

Benefits and Considerations

• Benefits: Using home equity allows you to invest without needing large amounts of cash upfront. It can expedite the process of acquiring investment properties.
• Considerations: It’s important to maintain a Loan-to-Value Ratio (LVR) below 80% to avoid LMI costs. Additionally, ensure that the rental income and your financial situation support the additional loan repayments.

For more information on using home equity, visit MoneySmart or consult the Australian Securities and Investments Commission.

Example Scenario

If you currently have a home loan of $300,000 and your house is worth $550,000, you have $250,000 in equity. To avoid LMI, you’d use up to $140,000 of this equity as a deposit for your investment property. This approach can significantly reduce the upfront costs associated with purchasing an additional property.

Conclusion

Using the equity in your home as a deposit for an investment property is a viable strategy that can accelerate your investment goals. However, it’s essential to understand the implications on your financial situation and consult with a mortgage broker or financial advisor.

For personalized advice and to explore your mortgage options, visit Bluestar Finance. Our team of experts is ready to help you make informed decisions about your investment property purchases.