What is equity and how can I use it to invest in property?

Answer

Equity refers to the current market value of your home minus the amount still owing on your home loan.

The reason equity can be a valuable resource in helping you achieve your property investment goals is that it can be used to secure finance for the purchase of an investment property.

If it’s something you’ve been thinking about, here’s some general information worth reading.

How do I calculate the amount of equity I have?

You’ll need to have a property evaluation first, but say your home is worth $800,000 and you still owe $300,000 on it—you’d have $500,000 of equity.

And, the more you reduce your home loan debt, the more equity you may have access to. Our equity calculator can help you crunch the numbers.

Another important thing to note is that if the value of your property goes up or down, the equity you have in it could also rise or fall in line with the new valuation.

Do I have to sell my property to access the equity?

You may be able to access all or part of your equity without selling. You can do this by borrowing against the equity and taking on an additional loan, or by increasing the loan you have currently.

Your home will act as security for your investment property loan and that’s where borrowing against equity can be risky—if you don’t make the repayments, you could lose your home as a result.

What additional factors do I need to keep in mind?

Even if you have a significant amount of equity, you may not be able to borrow against it. That’s because your lender is going to take into account a number of things, including your income, debts and whether you have kids.

If you do get the thumbs up, remember the purchase price is only one component of the upfront and ongoing costs you’re going to have to pay.

You’ll need to be prepared for things such as stamp duty, legal and conveyancing fees, and building, pest and strata inspection reports, which should all be budgeted for when you do your pre-planning.

Other things to look into:

  • Have you researched home loan options?
  • Will your repayments be higher and if so, by how much?
  • Do you have a household budget in place to accommodate for any additional costs?
  • Who will manage your investment property and what rent will you charge?
  • Are you across the legal obligations that apply to landlords?
  • Will you be eligible for tax deductions?

Purchasing an investment property can be exciting, but it’s important to make sure you’re across the risks as well as the opportunities. Speaking to a financial adviser can help.

Home equity calculator

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Important information

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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.

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