If you’re interested in property investment, you’ve likely heard of the term equity. Equity can be calculated by taking the price your property is currently worth and minusing the debt you owe against it. The difference between these two numbers is your equity.

Generally, you can draw on 80% of the available equity in a property you own to reduce the amount you need to save for a deposit on a new property.

Let’s break this down…

If your property is worth $800,000, 80% would be $640,000. But, if you owe $400,000 against your property, you must subtract the debt from $640,000. In this example, you could use $240,000 in equity.

How can I use more than just 80% of my equity?

1. If you’re happy to pay Lenders’ Mortgage Insurance (LMI), you could borrow more than 80% of usable equity.
2. Some lenders allow people in certain professions to access up to 95% of usable equity. Chat to one of our experienced mortgage brokers or your bank to see if you qualify.

How do property investors use equity?

Experienced investors commonly…

• Use equity to borrow 20% of the deposit for a property + the purchase cost (around 6% in South Australia).
  • Benefits:
    • Avoid paying LMI.
    • Maximise ‘Good Debts’ (debts which are tax-deductible).
    • Avoid tireless saving.

• Debt recycle. If you have $100,000 in your offset, redraw or savings account, you use this to pay down your ‘Bad Debt’ (debt which is NOT tax-deductible) against your principal place of residence. Then, draw it back out as an investment debt, as a separate loan split. When you draw out debt as an investment debt, it becomes a ‘Good Debt’.
  • Benefits:
    • Reduce your ‘Bad Debt’ by turning it into ‘Good Debt’.

How can I use equity to buy property?

Contact your mortgage broker or bank to discover the valuation of your property. Note: every bank will value your property differently. Consider comparing which gives the highest valuation so you can get the most equity possible.

How can I increase my home equity?

Don’t wait for the average growth of the property market to increase your equity and borrowing power. Bryan has 4 tips to force equity into your home. Check them out here.

Final consideration before drawing equity

Make sure your loans are not cross-securitised. A new video, coming soon, will discuss this concept and its impacts in deeper detail. If you’re ready to learn now, reach out to us at Rise High Investor.