Using Equity In Your Home For Investment Purposes

Getting  ahead financially is becoming further and further out of reach for many Australians. However many are now tapping into their “pot of gold” – the equity  in their home – allowing them to invest for the future and forge ahead financially

Diagram  1 illustrates the financial components of your home:

Using Equity In Your Home For Investment Purposes

Existing borrowings – represented by the blue section of your home.

This is the amount of your loan not yet repaid.  This loan amount (unless used  to purchase an investment property) is not usually tax deductible.

In this example, if your home was worth $500,000 and you had $150,000 remaining on your loan, your existing borrowings would represent 30% of your home value.

20% equity – represented by the red section of your home.

This is the safety net that lending institutions like to have as their safeguard against the borrowings on your home.

Usually this safety net represents 20% of the home value required in equity that is unable to be touched unless you want to pay LMI (Lenders Mortgage Insurance).

In this example 20% equity of $500,000 is $100,000

Remaining equity (what you’ve  already repaid on your loan or gained through capital growth on the property) – represented by the green section of your home

In this example it shows that the remaining 50% of the value of the home is available to use as security for other purchases.  To access this remaining equity (in this example)  to purchase an investment property, there are two options:  (A) establish a line of credit;  or (B) apply for a standard term  loan with a redraw facility or an offset account where  the remaining equity amount can be invested  until required.

Using Equity In Your Home For Investment Purposes1 

Typically the existing loan (blue) and the new portion of the loan (green) would be refinanced; however it is common to split these and create separate sub-accounts in order to keep the non tax deductible (blue) amount clearly differentiated from the deductible (green) investment amount.

In this example, $250,000 is 50% of the value of your home available  to purchase an investment property.
To access this remaining equity to purchase an investment property, there are two options:  (A) establish a line of credit;  or (B) apply for a standard term  loan with a redraw facility or an offset account where  the remaining equity amount can be invested  until required.

This $400,000 loan is represented by the pink section of the investment property in Diagram 3. Plus, (B) Part  of the green remaining equity in your home.

The remaining 20% of the purchase price (usually representing the deposit) plus stamp duty, conveyancing costs and other  associated expenses can be taken  from this equity.

In the example it would require you to draw $120,000 (assuming $100,000 [20% deposit]  and $20,000 [5% total acquisition costs*]) of the available  $250,000 (represented by the yellow section in diagram 2) leaving $130,000 of the remaining equity.
This could also be used  to purchase an additional investment property  if serviceability allowed or you could use this equity to fund any shortfall in your new investment loan repayments.

Then all you need to do is sit back and let the property take its course with capital gains generating some additional equity over the next seven to ten years, as it has proved to do so (even in tough times) over the last century.

Once you learn  this strategy you can repeat it as often as you want, provided you can re-pay the borrowings.

Disclaimer: *Acquisition costs vary in each state. For demonstration purposes only, we’ve assumed 5%.