How to buy your first investment property using your home's equity

Are you thinking about your retirement and if your superannuation balance will be enough to cover your living costs? Have you considered buying an investment property to build your retirement funds but are unsure of how to fund the deposit without a large savings account, or not wanting to use any of your savings? If you have equity in your home and a good income, an investment property purchase is a possibility.

How do I fund the deposit?

If your home has increased in value, you can use the equity in your home to fund the deposit.

Say your home is currently worth $1 million dollars and your current mortgage is $600,000. This means that you have $400,000 in equity. Using a strategy most preferred by the banks, they will allow you to borrow up to 80% of the value of your home. 80% of $1 million is $800,000, so you would have $200,000 to spend for the deposit and fees to purchase an investment property.

To obtain the $200,000, your home loan would either be refinanced to another bank, or increased with your current bank, if their policy allows it. Those funds would then sit in your nominated bank account, ready to use for an investment property purchase.

Preparing for your Investment Property Purchase

Now that you have the money for your deposit and fees, the next step is to obtain a preapproval to purchase an investment property. This loan would ideally be with a different bank to the one your home loan is with. The preapproval would be for 80% of the proposed purchase price.

Looking at the Numbers

We are assuming an investment property purchase price of $800,000. The costs are as follows:

20% Deposit                                       $160,000

Stamp duty         (in NSW)              $31,000

Using the $200,000 equity, there is $9,000 remaining for other purchasing costs including conveyancing, inspections and loan application fees

Investment Property Loan            $640,000

So you have spent none of your savings to purchase the property. Essentially, you have borrowed 105% of the purchase price which in consultation with your tax expert should be fully tax deductible.

For any questions or to find out if you can buy an investment property, contact Jennifer Lackersteen at JBL Home Loans by email jennifer@jblhomeloans.com.au or phone on 0414670151