How to Calculate Usable Equity for an Investment Property

If you already own a home, you may have built up equity without putting extra money aside.

Equity is the difference between your property's current value and the amount you still owe on the home loan. It can grow as you repay your loan or if your property's value rises.

Some property owners may be eligible to borrow against part of their home equity to help fund an investment property deposit and associated purchase costs. This may reduce the cash savings required upfront, but it also increases the amount borrowed and the repayments that need to be considered. 

However, having equity does not automatically mean you can borrow against it. Lenders will still assess your income, expenses, debts and overall borrowing capacity.

Step 1: Work Out Your Current Equity

Start with an estimate of your property's current value and subtract your outstanding home loan.

For example:

Property value: $800,000
Current home loan: $400,000
Total equity: $400,000

This does not mean you can automatically borrow the full $400,000.

Lenders normally consider your loan-to-value ratio, known as LVR, when deciding how much equity may be available.

Step 2: Calculate Your Usable Equity

A common way to estimate potential usable equity is to calculate 80 per cent of the property's value and subtract the existing loan balance.

This provides an illustration based on an 80 per cent LVR, rather than a universal lending limit.

The amount a borrower may be able to access depends on the lender's valuation, credit policy, serviceability assessment and other lending criteria. 

Using the same example:

80% of $800,000 = $640,000
Existing loan = $400,000
Estimated usable equity = $240,000

This example assumes there are no other loans secured against the property. Any additional secured debt may reduce the amount of equity available for further borrowing.

Depending on the lender, loan type and borrower circumstances, borrowing above this level may require Lenders Mortgage Insurance (LMI). 

LMI generally protects the lender if the borrower defaults and the sale of the secured property does not cover the outstanding debt. It does not protect the borrower from repayment obligations.

A lender will normally arrange or obtain its property valuation. The lender's valuation may also differ from an online estimate or real estate agent appraisal.

Step 3: Check Your Borrowing Capacity

Usable equity and borrowing capacity are not the same thing.

You may have significant equity but still be unable to borrow against all of it. Lenders assess your ability to meet repayments on the proposed additional debt. 

Under APRA's prudential framework, authorised deposit-taking institutions generally assess new housing loans using a serviceability buffer of at least 3 percentage points above the applicable loan interest rate, subject to permitted exceptions. Non-bank lenders may apply different assessment policies. 

They may consider your income, existing loans, credit card limits, household expenses, dependants and other financial commitments.

Expected rental income from the investment property may also form part of the assessment. However, lenders may not count all expected rent when calculating serviceability.

Step 4: Consider How the Equity Will Be Accessed

If you have sufficient usable equity and meet the lender's requirements, refinancing or increasing an existing loan may allow you to access additional funds. 

Before proceeding, borrowers should consider the interest rate, repayment amount, loan term and applicable costs, including discharge fees, application fees and potential fixed-rate break costs. Extending the loan term may also increase the total interest paid over time.

The released equity could then be used towards the investment property deposit and eligible purchase costs.

An investment property purchase may involve a separate loan secured against the property being purchased. 

However, lenders may also consider other security arrangements, including using more than one property as security. The available structures depend on lender requirements and the borrower's circumstances.

Loan structure is an important consideration when borrowing for an investment property. Separate loan splits may help borrowers identify and track funds used for different purposes. 

For taxation purposes, the deductibility of interest generally depends on how borrowed funds are used, rather than which property secures the loan. 

Where borrowing involves both private and income-producing purposes, interest expenses may need to be apportioned. 

A registered tax agent can explain how the relevant tax rules may apply to individual circumstances. 

Step 5: Allow for the Full Cost of Buying

The deposit is only one part of an investment property purchase.

You may also need funds for stamp duty, conveyancing, legal costs, building and pest inspections, and other upfront expenses.

Once you own the property, there may be ongoing costs such as council rates, insurance, property management, maintenance and loan repayments.

Rental income may help with these expenses, but periods without a tenant can occur. It is worth allowing room in your budget for unexpected costs.

Can Equity Help Build a Property Portfolio?

Some investors may consider accessing equity from an existing property to help fund another purchase. 

However, this increases their total debt and repayment commitments. Property values may fall, interest rates may change and rental income can vary. 

If a home is used as security for additional borrowing, it may be at risk if repayments cannot be maintained. 

Any further lending remains subject to lender assessment and approval. 

Understanding Your Home Equity Before an Investment Property Purchase 

Before using home equity for an investment property purchase, it is important to understand the additional debt, refinancing costs and ongoing repayment commitments involved. 

Reviewing these factors alongside your borrowing capacity can help clarify which lending options may be available.

White Picket Mortgages, based in Gloucester, New South Wales, can help you review your existing home loan, estimate potential usable equity and compare investment property lending options based on your circumstances. Call 0412 247 193 to discuss your borrowing requirements and available lending options.

Important Information

This article provides general information for educational purposes only. It does not take into account your personal objectives, financial situation or needs. It is not a recommendation to refinance, access equity, purchase an investment property or apply for a particular loan.

Equity calculations are estimates only. Access to equity and loan approval remain subject to lender policy, property valuation, serviceability, eligibility criteria and applicable fees. Additional borrowing involves financial risks. Consider obtaining independent financial, taxation or legal advice where appropriate before making property investment decisions.