Using Equity to Purchase an Investment Property

A Smart Move Towards Passive Income and Wealth Creation

When it comes to building wealth and generating passive income, property investment remains one of the most reliable strategies. One way Australians are getting ahead in this game is by leveraging the equity in their existing home to fund the purchase of an investment property. If you’ve built up equity in your home, you may be sitting on a powerful tool that can help you grow your property portfolio and secure your financial future. Here’s how it works and why it’s a great option for wealth creation.

Household Wealth in Australia at a Record High

Household net wealth in Australia has reached an all-time high of $16.2 trillion, driven largely by the booming property market. Property assets now total a record $11 trillion, with residential property accounting for approximately 67.9% of net household wealth. This means a significant portion of Australians are holding a vast amount of their wealth in property, providing an excellent opportunity for those looking to leverage this equity to build even more wealth through investment.

Property Investment in Australia: Key Statistics

According to the Australian Taxation Office (ATO), 2,245,539 Australians own investment properties, collectively holding 3.25 million properties. Here’s a breakdown of how many investment properties Australians typically own:

• 71.48% of investors hold 1 investment property
• 18.86% hold 2 properties
• 5.81% own 3 properties
• 2.11% own 4 properties
• 0.87% hold 5 properties
• 0.89% of investors hold 6 or more properties

These statistics show that the majority of Australians start with one investment property, and only a small percentage manage to build a larger property portfolio. Leveraging equity is a key strategy that can help investors expand their holdings and unlock future wealth.

What Is Equity?

Equity is the difference between the market value of your property and the amount you still owe on your mortgage. For example, if your home is worth $800,000 and you owe $400,000 on your mortgage, you have $400,000 in equity.

How Can You Use Equity to Buy an Investment Property?

The equity in your home can be used as security to borrow more money from your lender, often without the need for a cash deposit. Instead of saving up for years to buy your next property, you can tap into your existing equity to fund the deposit on an investment property. Typically, lenders will allow you to access up to 80% of your property’s value, minus what you still owe.

Using the example above, if your property is valued at $800,000 and you owe $400,000, you could potentially borrow an additional $240,000 ($800,000 x 80% – $400,000).

Steps to Access Equity for Investment

1. Get a property valuation: Your lender will typically require a formal valuation to determine how much equity you can access.
2. Refinance or apply for a new loan: Depending on your situation, you might need to refinance your existing loan or take out a new mortgage with your current or a new lender.
3. Use equity as your deposit: The equity released from your current property can act as the deposit for your new investment property, meaning you don’t need to save a large upfront amount.

Why Invest in Property for Passive Income?

An investment property can generate passive income through rental returns. As your tenants pay rent, you’ll receive regular income that can be used to cover mortgage repayments, property expenses, and more. Over time, if the value of the property appreciates, you also build more equity, potentially setting you up for future investments.

Benefits of Using Equity to Build a Property Portfolio

1. Leverage without selling: You don’t have to sell your home or spend years saving for a deposit – you can use your existing assets to grow your wealth.
2. Compound growth: With time, your investment properties will likely appreciate in value, adding to your equity and creating the potential for future purchases.
3. Tax benefits: The costs associated with maintaining an investment property, including loan interest and property expenses, may be tax-deductible.
4. Diversified income streams: A well-managed property portfolio can diversify your income, reducing reliance on your day job or other income sources.

Things to Consider

While using equity to buy an investment property can be an effective wealth-building strategy, it’s important to carefully assess the risks and costs involved. Here are a few key things to keep in mind:

• Cash flow: Ensure you can comfortably cover any shortfall between rental income and mortgage repayments.
• Interest rates: Keep an eye on interest rate changes, which could impact your loan repayments and overall cash flow.
• Loan structure: Speak to your mortgage broker about the best loan structure for your needs. You might want to explore interest-only options or offset accounts to help manage your repayments.
• Property selection: Not all properties will generate strong returns. It’s essential to research the market and choose an investment property with good rental yields and capital growth potential.

Leveraging equity to purchase an investment property is a proven way to build a property portfolio, create passive income, and grow your wealth over time. With Australia’s residential property market now making up nearly 68% of household wealth, and over 2.2 million Australians already investing in property, this strategy provides a clear path to financial independence. By working with a mortgage broker, you can ensure you have the right loan structure in place and make informed decisions that align with your financial goals.

If you’re ready to explore how you can use the equity in your home to begin your property investment journey, contact Shore Financial today. Our expert brokers can help you navigate the process and find the best solution to suit your needs.