Property investment 101: how to use equity to start your portfolio
Many Australians believe they need a mountain of cash savings to buy their first investment property. They spend years scraping together a deposit while property prices continue to climb. If you already own a home, you might have the resources you need sitting right under your roof. It comes down to understanding equity and how to use it without putting your financial stability at risk.
This is not about getting rich quick or overextending yourself. It is about understanding the mechanics of finance so you can make decisions that support your long term goals.
Understanding the 80% rule
Equity is simply the difference between what your property is worth and what you owe the bank. However, you typically cannot access every cent of that value because banks generally require a buffer to manage risk.
To calculate usable equity, most lenders will allow you to borrow up to 80% of your property's value. The formula is straightforward. You take the current value of your home, multiply it by 0.80, and then subtract your existing mortgage debt. The result is the amount you can potentially access to use as a deposit on an investment property.
A practical example
Imagine you own a home valued at $1,000,000 with a mortgage of $500,000. On paper you have $500,000 in total equity. But remember the bank needs its safety buffer.
Here is the usable equity calculation:
Property value: $1,000,000
Bank limit at 80%: $800,000
Less existing mortgage: $500,000
Usable equity: $300,000
In this scenario you could potentially access $300,000 to cover the deposit and stamp duty for an investment purchase. This is all subject to you being able to service the increased loan amount.
How to structure the loan
Once you know you have the equity, the next question is how to structure the loan. You generally have two options.
Stand alone loans keep your properties separate. You take a new loan against your home for the deposit and a completely separate loan for the remainder of the investment property purchase. This structure often provides more flexibility and protects your home from issues that could arise with the investment property.
Cross collateralisation occurs when the bank uses both your existing home and the new investment property as security for the new loan, linking the properties together. This saves you from needing to release equity as a separate step, however each property becomes subject to the performance of the other. If one value drops significantly or you want to sell one, both are affected.
Repayment types: Interest Only vs Principal and Interest
You will also need to decide how to repay the debt.
Interest Only means your monthly repayments only cover the interest on the loan. The debt amount does not go down but your monthly cash flow is better. This is often favoured by investors to keep holding costs low.
Principal and Interest means you are paying off the actual debt along with the interest. This reduces your loan over time but requires higher monthly repayments.
The right option depends on your broader strategy and cash flow position.
The bottom line
Using equity is a powerful tool but it requires a clear strategy. Accessing the money is just the first step. The goal is to ensure your portfolio is structured to handle the realities of the market while keeping your home secure. If you want to run the numbers on your own situation, reach out for a conversation.