How to Use Equity to Purchase Your Next Property

Refinancing

8 Oct

Using the equity in your home to buy your next property is a common and powerful strategy - but it needs careful planning. Equity is a real asset you already own and, when used the right way, it can unlock a deposit for an investment property or even help you upgrade. I’ll explain what equity actually is, the main ways to access it, how lenders look at it, the practical steps you should take, and the risks to watch for. The aim is to give you a clear, practical framework so you can run the numbers with confidence.

What equity is and how to calculate it

Equity is simply your property’s market value minus what you still owe on mortgage loans secured by that property. If your house is worth $700,000 and you owe $400,000 your equity is $300,000. That equity isn’t cash in the bank but it is borrowing power lenders will consider. Use a lender’s equity calculator or a recent valuation to get an accurate figure before you make plans.

Common ways to access equity

There are a few mainstream ways people access equity to buy another property: refinancing to withdraw equity as a lump sum, getting a line of credit against the existing security, using a second mortgage, or structuring a loan where the current property is cross-collateralised with the new one. Each product has pros and cons - for example a line of credit is flexible but may have higher variable rates, while a refinanced fixed loan can give certainty for a set term. Look at fees, interest rates, redraw rules and whether the lender prices differently for investment lending.

How lenders assess what you can borrow

Lenders focus on loan to value ratio or LVR which measures how much of the property value is mortgaged. Commonly lenders like an overall LVR at or below 80 percent to avoid lenders mortgage insurance, but acceptable LVRs and criteria vary between lenders and loan types. Lenders also assess your income, expenses, credit history and the borrowing profile for the new property - owner-occupier or investment. Expect an appraisal of your home’s current market value and a careful affordability check.

Practical steps to use equity to buy your next property

Work out accurate equity: Get a recent market appraisal or use reputable online estimators then confirm with a lender’s calculator.
Choose a structure: Decide whether you want a lump-sum refinance, a line of credit, or a second loan - compare ongoing costs and flexibility.
Run the numbers: Model repayments, serviceability under higher interest rates and the impact on your overall LVR. Factor in stamp duty, conveyancing, and potential rental vacancy if it’s an investment.
Consider tax and legal implications: Interest on loans for investment properties may be tax-deductible but tax rules are personal and can change. Get tailored advice from an accountant or tax professional before locking anything in.

Risks and practical tips

Using equity increases your overall debt and puts your home at risk if repayments become unaffordable. Over-leveraging is a common pitfall - don’t borrow the absolute maximum just because you can. Also consider the effect of rising interest rates or falling property values on your cash flow and net equity. Keep a buffer in your budget and avoid structures that tempt you to spend equity on non-wealth-building items. Finally, compare lender policies on cross-collateralisation and read the fine print on fees and break costs.

Conclusion

Equity can be a fast track to your next property if you plan properly: calculate accurate equity, choose the right loan structure, stress-test the numbers for rate rises and vacancies, and check tax and legal consequences with specialists. Done well, using equity is a strategic way to grow your property portfolio - done poorly it can create unnecessary risk. Take time to compare options and understand the trade-offs before you proceed.