Ask An Adviser - How Can I Use My Equity To Buy A Second Property?

Top answer provided by:

Michael Paraskevopoulos

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Hi Maria, 

Great question, and one that we’re asked by many like yourself, who are looking to use the equity in their home to build their property portfolio.

There are multiple ways to use the equity from your current property to buy a second property. What's suitable for you depends on your circumstances, so I can only provide you with general information.

Before we dive into the strategies, let's talk equity. Your home equity is the difference between the value of your property and your outstanding home loan, as shown in the example below.



So, as you continue paying down your debt, your equity increases (all else being equal). But most lenders will typically only let you use up to 80% of your equity when borrowing for a second property. You can think of this as your “usable equity”, as shown in the example below.



Understanding your usable equity is vital when determining if (and by how much) you can use your property to purchase a second property. 

Now, let's talk strategy. There are several to pick from, each with its benefits and drawbacks. A good financial adviser can help you choose the right solution for your circumstances. Here's a basic explanation of some options to consider.

Refinancing Your Existing Home Loan

Refinancing involves replacing your existing mortgage with a new one, usually with better terms. By refinancing, you can access a portion of your home equity as cash. You can then apply for a second mortgage for your investment property and use the freed-up cash to fund your deposit, stamp duty, and buying costs.  

Line of Credit

A home equity line of credit allows you to borrow a lump sum against the equity in your current property. You can use this line of credit to cover your second property’s deposit, stamp duty, and buying costs. It's generally more flexible than refinancing but is typically more expensive.

Cross-collateralisation

Cross-collateralisation effectively binds properties together. It can be done by establishing a new mortgage using multiple properties as security, or by using a single property as security for multiple mortgages. Using cross-collateralisation comes with risks and complexity not found with other options. But there are circumstances where it can have more favourable terms and potential tax benefits.

Tap Into Your Existing Redraw or Offset Facility

If you have a redraw facility and have been making extra repayments to your home loan, you can "take back" the extra repayments and repurpose them for your investment property purchase. Similarly, if you have cash sitting in your offset account, you can use it to help fund the deposit, stamp duty, and buying costs of your second property. In both cases, you're effectively increasing the interest-bearing loan amount on your existing property to free up equity for your new property. But the tax treatment of the loan can vary depending on if you use a redraw or offset facility, and record-keeping can be difficult if not done correctly. Seek professional advice.

Maria, it bears repeating that having a qualified expert in your corner can help you choose the best path. While professional advice comes at a cost, it could mean you pay significantly less tax or interest over the life of the loan. 

I hope this has helped you and given you a starting point, and I wish you all the best in your property journey.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Michael Paraskevopoulos

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