How To Use The Equity In Your Home To Buy An Investment Property
You might be closer to buying an investment property than you realise.
If you’ve owned your home for a few years, especially if you bought at pre-pandemic prices, there’s a good chance its value has increased. Your overall mortgage amount will have likely been paid down too, even if that movement hasn’t been dramatic month to month. Put those two things together, and you may be sitting on more equity than you think.
For many New Zealanders, their home equity just sits there in the background, something you’re vaguely aware of, but you don’t actively use. But for others, it unlocks the next step into property investment.
It’s not a quick win, and not without risk, but if you understand how equity works and can use it without stretching yourself too thin, it’s a great way to make the most of what you’ve already built.
What is Home Equity?
Most people wouldn’t be able to tell you how much equity is in their home off the top of their head. But if you have a rough idea of what your home would sell for in today’s market, and know what’s left on the mortgage, the gap between those two numbers is what’s sitting untapped in your property.
Although you can’t release that money until you sell your home, in some situations, a lender will let you borrow against part of it. That might involve increasing your existing mortgage, setting up a separate loan secured against your home, or using a dedicated equity loan or top-up facility.
However it’s structured, the important thing to remember is that you’re still borrowing. Repayments apply. Interest applies. And your home remains part of the security.
Taking Stock of Your Financial Position
Before looking at investment properties, it’s worth slowing things down and looking at the full picture. After all, equity alone doesn’t tell you what’s financially sustainable.
Borrowing against your home increases your overall debt, which means higher repayments and more risk if interest rates change. It also means less cash flow, and while rental income can help, it’s not predictable. Costs come up, and tenancies don’t always line up neatly.
Essentially, having equity and being able to use it comfortably are two different things.
Financing an Investment Property Using Equity
There are a few different ways to structure investment property loans using equity. Some people top up their existing home loan. Others prefer a separate loan secured against their home, which keeps the investment lending clearly split. In some cases, bridging finance may come into play, particularly if you’re buying before selling.
Each approach has trade-offs. Simpler structures can be easier to manage early on, but less flexible later. Separate loans offer clearer tracking and more control, but come with extra moving parts.
Risks Worth Thinking About Early
Using an equity loan can accelerate your progress into property investment, but it also increases your exposure to risk. And when your home is being leveraged against your investment, there’s a whole extra layer of stress.
The biggest trap is over-leveraging and not accounting for things outside your control. Borrowing to the limit might be exciting initially, but it leaves little wiggle room if things go wrong. Interest rate rises, council tax increases, repairs, or periods without tenants will all make an already tight margin unsustainable.
Buying an investment property that’s well within your budget gives you a much-needed buffer, financially and mentally.
How an Adviser Can Help
Using equity well is less about how much you can borrow and more about how the lending is structured and managed over time. An adviser can model different scenarios and structure lending in a way that works for you.
Unlock the potential of your home, speak with a Vega mortgage adviser.