How to turn yourself into a property investor with money you already have

Over time, as you pay down your mortgage and your property value increases, you accumulate equity.

Many Australians are experiencing a boost to their equity. National home prices were up 5.26% in the year to January’s end according to PropTrack data, but some cities such as Brisbane and Adelaide have seen double that growth with dwelling medians up 10.71% and 10.52% respectively.

Perth had a bumper year with values soaring 15.45% in just 12 months.

We know home equity is a powerful financial tool that can allow you to renovate, refinance, consolidate debt, but you can even purchase an investment property if it’s harnessed correctly.

What is home equity?

Put simply, home equity is the difference between your property's market value and the outstanding balance of your mortgage.

It’s important to note, however, that not all your equity can be used because lenders typically only allow access to a portion. Usually, you can tap into as much as 80% of your home’s value, minus what you still owe on the loan.

Perth-based Mortgage Choice broker Shannon Hassett said the subject of equity is still unknown territory for many Australian homeowners.

'What is home equity?' youtube.com/mortgagechoice

“People often have the misunderstanding that if their property is worth $1 million, and they owe $500,000, then they can access $500,000," she said. "They don’t consider the 80% rule.

"There's a big misconception between available equity to use, and equity that's built if they were to sell.”

Who has home equity?

REA Group senior economist Eleanor Creagh said loan to value (LVR) ratio data from the Australian Bureau of Statistics is showing that Australians are holding significant equity in they homes.

“Many borrowers have substantial equity accumulated, about 30 to 70% of the property value,” she explained.

“Compared to January 2019, there's been a clear shift to lower LVRs, indicating borrowers now owe less relative to the value of their homes, following substantial price growth.”

This move towards lower LVRs means an increased number of households are protecting their own financial future with their homes.

REA Group senior economist Eleanor Creagh says higher home equity is useful for mitigating against market shocks. Picture: supplied

“Higher home equity provides a buffer against interest rate rises, income shocks, or price corrections, reducing any risks to their financial stability,” Ms Creagh said.

Things to consider before tapping into home equity

Prior to leveraging your home’s equity, Ms Creagh warned that homeowners should crunch the numbers to ensure they won’t be financially worse off in the long run.

“Taking on more debt, after accumulating equity will typically come with increased risk. If home prices fall, equity can shrink quickly. It’s always best to seek advice relating to one’s personal financial circumstance from trusted advisors and mortgage brokers.”

Ms Hassett added that it pays to ask yourself if you can comfortably service higher loan repayments after the equity has been accessed.

“A lot of clients don't understand that they actually take out a loan to access their equity, so the debt goes up,” she said, adding that homeowners should ensure the borrowing cost of using their equity is justified by the potential returns.

'When do you need a mortgage broker?' youtube.com/mortgagechoice

“Typically, most of our clients want to either consolidate debt, buy cars or caravans, do renovations, or buy investment properties,” she explained.

“They might also have had mum and dad go as a guarantor when they bought, so we'll work out a way to release those guarantors. Paying off student loans and credit cards are also common reasons for accessing equity.

Others who get a valuation done after renovating realise they've created more equity again, so they're buying a second property.”

Using equity to buy an investment property

Once you secure enough equity in your home, you may feel ready to use that wealth to enter the property investment market.

By leveraging your existing property’s equity, you might not need to save for a lump sum deposit to start your investment property portfolio.

Leveraging your equity - money you already have - is ideal to expand your property portfolio. Picture: Getty

The benefits of becoming a landlord include improved cashflow from rental income and potential capital growth adding to your long-term wealth.

But it’s vital that you consider your increased debt levels, interest rate fluctuations and property market conditions which could impact your investment’s profitability.

Using equity to renovate

With the cost of building skyrocketing over recent years, renovating has never been pricier. One of the most popular ways to use home equity is to fund renovations or basic home improvements.

From installing a new kitchen to adding a whole new level, your equity can help you upgrade and upsize without moving home.

The benefits of using your equity to renovate is twofold; it can increase your property value and your overall wealth, while also tailoring your home to better suit your lifestyle needs. Additionally, there may be tax benefits when improving a rental property, as some expenses are tax-deductible.

'5 areas to transform the exterior of your home': youtube.com/realestatecomau

Using equity to refinance

Today’s home loan market is competitive. Mortgage Choice currently has hundreds of products from 38 lenders with some lenders offering better interest rates, low fees or other perks.

Refinancing is also a way to ensure you’re getting the best mortgage deal for your circumstances.

The one warning when refinancing is to look out for potential hidden costs, such as break and establishment fees.

Using equity to consolidate debt

Speak to most financial advisers and they’ll tell you there is smart debt, and not so smart debt.

Using home equity can be a smart way to consolidate any high-interest debts such as credit cards, personal loans, car loans or a HECS balance into one lower-interest home loan.

The bonus of rolling debts into your mortgage is not just about reducing interest, it means you’ll have one repayment rather than multiple bills due at different times. By simplifying your finances you’ll reduce stress as well.

Debt consolidation is a popular choice for people looking to make the most of their home equity. Picture: Getty

There are pros and cons to converting your short-term debts into your long-term mortgage. While fewer repayments may feel easier to manage and improve immediate cash flow, be aware that you could end up paying more interest over the length of your home loan.

Using equity to fund other investments

Even though the equity in your home comes from real estate, it can be used to invest in a number of assets including shares and managed funds.

Some homeowners also dip into their home equity for major life expenses, such as education for themselves or their children, medical expenses, or starting a business.

Investing in shares or managed funds can offer greater rewards and diversify your wealth across asset classes, but the risks are generally higher than keeping your money in bricks and mortar.

At the end of the day, if your investment doesn’t pay off, it’s worth remembering that you’ll still have your mortgage debt to pay down.