Invest smarter, not harder: using equity to buy investment property

A lot of people mistakenly think they have to be debt-free before they can invest. What many homeowners don’t know is that they can buy an investment property before paying off their mortgage, simply by accessing the “usable equity” in their residential home – that is, the money that’s gone into paying off their home loan over the years.

Equity is the difference between what your home is worth and what you owe on the property; that money belongs to you, not the bank. This means you can pull it out and put it towards a tax-deductible, cash-positive investment to help fund your retirement. The upside is that your equity is working harder to make you money, rather than just sitting idle.

There are many opinions about how much equity you need exactly, and lenders all have slightly different criteria, but a minimum of 20 per cent of your home’s value is a comfortable amount to leave untouched. Anything over that amount becomes usable equity – or, in other words, money you can then use as a deposit for an investment property.

If your home is worth $750,000, for example, and your loan is $450,000, you have $300,000 worth of equity. To be safe, you should keep at least $150,000 of equity in your home loan, leaving $150,000 of usable equity you can access. So, you still have that 20 per cent equity buffer on the home you live in, but you now also own a second property that is paying for itself with the rental return from your investment property. This, of course, means you have two properties going up in value instead of just the one – which is compounding your capital growth.

For more information, contact Jason Dwyer from Dwyer Property Investments on 1800 088 437.