Using the equity in your home to purchase an investment property is a common strategy among Australian investors. Equity is the difference between your property's current market value and the remaining balance on your mortgage. By leveraging this equity, you can potentially fund a deposit or even cover the entire purchase price of another property.
To access your home equity, you typically have two options: refinancing your existing mortgage or taking out a home equity line of credit (HELOC). Refinancing involves renegotiating your mortgage to a larger amount, using the extra funds to invest. A HELOC works like a credit card, allowing you to draw funds up to a certain limit.
A common misconception is that you can access all the equity in your home. Lenders usually allow you to borrow up to 80% of your property's value, minus your current loan balance. This means if your home is worth $800,000 and you owe $400,000, you might access up to $240,000 for investment purposes.
Take a practical example: Imagine you own a home in Melbourne valued at $1 million with an outstanding mortgage of $500,000. By refinancing or using a HELOC, you could potentially access up to $300,000. This amount could serve as a deposit for an investment property, enabling you to purchase a $800,000 two-bedroom apartment in Sydney. If you are in the 37% tax bracket, the interest on your investment loan is tax-deductible, potentially reducing your tax bill significantly depending on your specific circumstances.
In our experience reviewing thousands of properties across Australia, we often see investors underutilising their equity due to a lack of understanding of how it can be leveraged. Many assume that equity is only accessible in full, without realising the borrowing limit imposed by lenders. Another frequent oversight is not considering the impact of increased debt on cash flow, which can strain finances if not planned carefully.
The answer can differ depending on your situation. If you purchased your home before 1985, any capital gain might be exempt from CGT, affecting your overall strategy. Additionally, if your home is held within a Self-Managed Super Fund (SMSF), different rules apply, potentially limiting your borrowing capacity. Joint ownership or partial year ownership can also influence the amount of equity you can access and how it impacts your taxation.
Given the complexities involved, it's crucial to consult both a Chartered Quantity Surveyor and a financial advisor. A QS can provide insights into the potential tax benefits and depreciation schedules, while a financial advisor can ensure that leveraging equity aligns with your broader financial goals and risk tolerance.