How much equity do you need to invest in property?
2021 saw Australian property prices increase by more than 20 per cent. If you have owned your home for a few years, there may now be a significant gap between the amount you owe and what your home could sell for. This gap is your ‘equity’, and the great news is you can use it as a deposit for a subsequent home purchase.
How to calculate equity
Your equity is the sum that’s left when you subtract the amount you still owe on your property from the amount it is worth.
For example, if your home is priced by a professional valuer at $1 million and you owe $600,000 on your home loan, your equity is $400,000.
The good news is, if you purchased a home for $1 million more than a year ago, it might have increased by up to 22%, making your home now worth $1.22 million. Because equity is, in essence, the percentage you have already paid off on your home, when your home gains value, so does your equity.
If you find the numbers confusing, there are plenty of online equity calculators that do the work for you. Try loans.com.au, or lendi.com.au (note that we are not affiliated with either). Most major banks also have their own versions to tell you how much equity you can use as a home deposit, otherwise you can speak to Edge Advisory Partners accredited Mortgage Advisers.
Note that a professional home valuer will give you a different figure from a real estate agent or an online real estate platform. Property agents tend to quote higher because they are considering the absolute top dollar your home would sell for. A valuer tends to offer a figure that’s based on an emergency sale.
Using equity to borrow
Now you know you have, for example, $500,000 in equity. Unfortunately, you can’t use it all to borrow.
Generally speaking, the rule of thumb is that you can use 80 per cent of your equity as security for an additional loan. In this case, your ‘deposit’ is around $400,000, less any other loans you have secured against the property.
Lenders will also take all the usual factors involved with borrowing large sums of money into account. You will still need to prove that you have the income and assets to repay the loan, no matter how much equity you have.
Do I have enough equity to buy an investment property?
The amount of equity you will need to purchase an investment property depends on a few factors. Naturally, the amount you want to borrow is the main consideration. Equity of a few hundred thousand will not be enough to borrow millions of dollars for a beachside mansion but it will be enough to expand your property portfolio.
You can use equity to put towards a loan for an additional property, but you still need to be able to pay back the repayments. A tenant should help to take care of a percentage of the repayments and holding costs but your loan broker will help you do your figures so you know you have the income as well as the equity to make a smart purchase.
Why use your equity?
The beauty of equity is that it has the potential to create more equity. Once your property has grown in value over time, you have the potential to invest again by using that value as the deposit for another property. There are also clever ways to cost-effectively improve your property so you can increase the equity you have in it. Most expenses involved in investment properties such as maintenance, interest and advertising are tax deductible and any losses incurred on investment properties can be offset against your other income in turn reducing your tax payable.
The equity generated by Australia’s property boom in 2021 is akin to winning the lottery for many people. Some of us earned more from our homes than we did from our jobs. If you believe you have enough equity and an income strong enough to fund a property purchase, reach out to a broker from Edge Advisory Partners for support to take the next steps.