How to buy an investment property using your home’s equity

Want to grow your investment portfolio but have most of your wealth tied up in your family home? You may be able to leverage recent gains in the property market as equity for an investment property. Let’s take a look.

We all have a few financial goals.

And right now, investing in a rental property is one of the more popular investment goals among Australians.

In fact, more than one-in-five Australians (21%) aspire to own investment properties to build their wealth, according to MLC’s Financial Freedom report. And interestingly, this percentage increases to 27% for Gen Zs and 23% for Gen Ys.

Investors are also piling into property, with lending for investment properties up more than 30% over the past year, according to Australian Bureau of Statistics data.

It’s not hard to see the appeal.

Rents have surged 39.7% over the past five years, rental vacancy rates are wafer thin at 1.3%, and home values nationally have jumped 13.5% since January 2023

Recent property price increases can hold the key

CoreLogic’s latest Pain and Gain report reveals that property profits have just hit a 14-year high.

This saw homes resold in the first quarter of 2024 dish up a median profit of $265,000.

So how does ‘cashing out equity’ in recent property gains work if you don’t sell your home?

Here’s one example.

Let’s say you bought a $750,000 house five years ago that, due to property price increases in recent years, is now valued at $1 million.

And let’s also say you took out a $600,000 loan for that house, which you’ve managed to pay down to $500,000.

By refinancing that remaining $500,000 home loan balance into a $700,000 loan (70% of your property’s new market value), you can unlock $200,000 in equity to use as a deposit for an investment property.

It’s also worth noting that when using this strategy banks will typically let you borrow up to 80% of a property’s market value.

So if you upped the ante and refinanced to an $800,000 loan, you could unlock $300,000 in equity.

This allows you to enjoy all the perks of becoming a property investor – including earning rental income, capital gains and possible tax benefits – potentially without drawing upon cash savings.

Better still, if your rental property grows in value, the rising equity in that property can be used to invest in additional properties.

Other strategies to become a property investor

There are plenty of pathways to becoming an investor.

You may have the funds available to pay a cash deposit.

Or you might be thinking of holding onto your current home, and using it as a rental after you upgrade to your next home.

Or, you might have other investment goals outside the property market altogether (such as using your home’s equity to invest in shares or boost your super balance).

What matters is that you know the options available for your situation.

Like to learn more? Call us today to find out how you could become a property investor.