How to calculate your home’s useable equity

Did you know you can use the equity in your house to help finance the purchase of an investment property?

We sat down with Bankwest Stores and Lending Network General Manager Carolyn Morris to learn how owner-occupiers can use their home equity to launch into a career as a property investor.

What is home equity and how can it help me?

Home equity is the difference between a property’s current market value and any debt held against it.

“The good news for first-time investors is that equity may be used towards the purchase of an investment property,” says Morris.

“Depending on your particular financial circumstances and the amount of equity available in your home, you may even be able to finance the entire purchase price of your investment property, including any additional costs such as stamp duty and settlement fees.”

It’s important to remember that you might not be able to use the entire amount of your available equity, as a dip in property prices could leave you exposed.

“If your financial circumstances permit, a bank will more typically lend you 80% of your home’s current value, minus any debt still owing,” says Morris.

How to calculate your home’s useable equity

Let’s say your home is worth $500,000 on today’s market and you still owe $200,000 on your mortgage.

Given most banks will likely lend you no more than 80% of your home’s current value, here’s how to calculate your home’s usable equity:

• Your home’s value = $500,000 x 0.80% = $400,000
• The amount of your outstanding loans = $200,000
• Your home’s potential useable equity = $400,000 – $200,000 = $200,000

So, if your home is worth $500,000 and you still owe $200,000 on your mortgage, you have $200,000 of useable equity towards the purchase of an investment property.

But “you’ll still need to show the bank you can afford the repayments on the full loan amount, which will include both the previous mortgage and the new one,” warns Morris.

How much can I spend on my investment property?

You can spend four times the amount of your usable equity on an investment property. At least, that’s the general rule of thumb. For example, if the potential useable equity on your home is $200,000, you may be able to purchase an investment property worth up to $800,000, inclusive of stamp duty, legal fees and other costs.

“Of course, that’s subject to your ability to afford all repayments,” adds Morris.

To get an even clearer idea of how much you’ll be able to spend on an investment property, check out our borrowing power calculator.

How much will it cost to access my equity?

There are various factors that can impact the cost of accessing your equity.

Morris says if you want to access more than 80% of your useable equity, you’ll need to pay for lenders mortgage insurance (LMI), the price of which varies greatly depending on the lender, the level of risk and the interest rate charged.

“If you decide to switch lenders, you’ll need to take into account additional costs, such as application and government fees. There may also be costs associated with closing your current loan product, especially if your home loan predates 1 July 2011, when exit fees were abolished,” she says.

In short, using the available equity in your home makes buying an investment property an achievable goal.

If you think it may be the right path for you, speak to a trusted lender for specific advice that takes your personal financial situation into consideration, as well as other professionals such as your accountant, and property experts.

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