Using Home Equity Loans for Property Investment: A Beginner’s Guide

By: Aaron Robbins

Once you’ve purchased your first property, whether it be a business or the family home, the itch to move forward with further investment can be tempting to scratch. If you’re keen to understand how to use the equity in your home for property investment, we’ve provided the below beginner’s guide on how you can do exactly that by using a home equity loan.

How to use home equity to invest

Equity can feel a lot like that $20 note you found in your jeans pocket at the first wear in winter, or stumbling across a long lost bank account. Your home’s equity is tucked away, sometimes out of sight, because while we often see our mortgage statements, we don’t always get a property valuation to see how much equity has built up in our home value!

Calculating your equity using your home loan

The true amount of equity that is in your home is not actually known until you have a property valuation performed. However, your council rate’s notice or looking at comparable sales real estate websites can indicate what your home’s approximate market value is. Once you have an approximated amount, you simply deduct the outstanding debt or home loan balance from the home’s current value, and the result is your equity amount.

Unfortunately, equity isn’t an amount of cash sitting in a bank account for you to easily access whenever you need. Using equity to invest doesn’t always mean physically cashing in, but rather, using the value of your equity to support another investment endeavour.

Using home equity loans to buy an investment property

It might surprise you to learn that experienced property investors don’t often pay a cash deposit to put towards an investment property, but rather use a specific type of loan to leverage the equity in an existing property! Home equity loans are one such loan, allowing you to use the equity in a residential property or commercial property to buy an investment property.

Investing in your business

Property investment isn’t the only form of investment that you can achieve using a home equity loan. Many business owners use home equity loans to invest back into their business — after all, better business income means paying off your home loan sooner and therefore building your equity back up quicker.

Many of our clients at Diverse Funding Solutions use home equity loans to:

  • Boost their business’ working capital or business cash flow.
  • Fund renovations to their retail space, office space or workshop.
  • Consolidate business debt or repay an ATO debt.
  • Purchase another business premises, or fund expansion activities such as hiring staff or fitting out newly leased spaces.

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How do home equity loans work?

Home equity loans are essentially the keys that unlock the equity that is sitting in your property value. How much useable equity you have will of course depend on your property value and outstanding home loan balance.

Usable equity

A DFS home equity loan allows you to use up to 75% of the equity in your home.

Loan terms

A home equity loan isn’t offered over the same long term as home loans are. Instead, at Diverse Funding Solutions, we offer home equity loans across terms between 2 – 36 months.

Tax implications

Everyone’s financial situation differs, which is why it’s important to access any tax advice that you need before proceeding with any large financial decision. If you use a home equity loan to purchase managed funds, exchange-traded funds or shares, it can be considered a gearing strategy, which has it’s own set of tax consequences, as does earning income from investment properties. Whether this represents a high-risk strategy for you depends on your overall investment experience, and investment risk profile. Professional advice can provide you with the confidence to proceed.

Is a home equity loan the same as an investment loan?

Investment loans come in many different forms. The loan structure of a home equity loan differs from many other investment loans on the market, as it uses your existing home to purchase an investment property under a new loan.

What to consider before buying property with your equity

Before accessing equity to buy a second property, it’s important to consider all aspects of property investment.

Build your equity

  • Any extra repayments you can make on your current property will boost your equity leading up to your home equity loan application.
  • Keeping funds in an offset account still contributes to your equity.

Changes in the property market

  • While there is likely more equity in your home value right now, if the property market experiences a sharp decline, so too will your available equity.

Additional costs

  • You’ll need to factor in the cost of stamp duty, government fees and legal fees when budgeting for property investment. If there isn’t enough equity to cover these expenses, they’ll need to come from your business or back pocket.

Impacts to your existing loan

  • Using the total equity in your home leaves no further equity to leverage for other uses.

Account for rental income

  • Don’t forget to factor in the rental income you’ll likely derive from your investment property when assessing how much you can realistically afford to borrow.

Accessing one of Australia’s leading home equity lenders

Not all home lending specialists offer home equity loans. Diverse Funding Solution uses its Australian Credit Licence to provide a range of loan options to Australian business owners.

The market value of homes in Australia has risen drastically over the past 12 months, meaning there is probably considerable equity sitting in your home’s value. Now is the time to act, if you’re looking to borrow money through a home equity loan.

Let DFS put the accessible equity in your home within reach to kickstart your property portfolio. Contact DFS to access experienced professionals in the home equity loan space and some of the most competitive interest rates in the private lending market.

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