Useable equity – how to use the equity in your own home to buy an investment property

You don’t need $120,000+ in cash to buy an investment property. In fact, many Kiwi investors purchase properties with no money down at all.

Instead, they use the existing equity they have in their own home to fund the deposit for their first investment.

This article breaks down exactly how this works and how you can purchase an investment property with no money down.

And if you have a question, write your questions or thoughts in the comments section below.

How to fund the deposit for your first investment property

If you’ve owned your own home for a while, two things are likely to have happened. You are likely to have paid down your mortgage - and the property has probably also increased in value.

This creates wealth within your home because it’s worth more, and you’ve got less debt held against it.

You can borrow against this newly created equity to fund the deposit for an investment property.

You do this by taking out a new loan secured against your own home.

You’ll then use that money as the deposit to get another loan secured against your new property.

For instance, let’s say the bank will allow you to borrow an extra $120,000 against your own home. Generally, another bank will then lend you up to $480,000, which is secured against the brand-new investment property.

That gives you $600,000 in total to invest.

If you then use that money to purchase a property, you will have bought it without using any cash. You’ll only have used equity.

How much can I borrow against my own house?

You can borrow up to 80% of your own home’s value under the Loan to Value Ratio (LVR) restrictions, which the Reserve Bank has just reintroduced.

If your owner-occupier home is worth $1,000,000, you will generally be able to borrow $800,000 against it.

But most Kiwis won’t be able to borrow all of that for investment since they already have a personal mortgage secured against that property.

Continuing with the above scenario, let’s say you already have a $500,000 personal mortgage.

Here’s your situation:

• The maximum amount you can borrow against the home is $800k,
• But you’re already using $500k of that as a personal mortgage
• So you have a maximum of $300k left to use as the deposit for an investment property.

That $300,000 is what we often call Useable Equity. It’s sometimes also called dead-equity or lazy money because if you don’t use it to invest, it doesn’t give you a return.

The formula for calculating your useable equity is:

(Home Value x 0.8) – Personal Mortgage = Useable Equity.

If you prefer a calculator, use the tool below to figure out the value of properties you can potentially buy.

How many investment properties can I buy with that deposit?

The value of the investments you can buy with your deposit depends on the types of properties you decide to buy.

Under the new LVR restrictions, which the Reserve Bank will introduce from May 1 2021, investors need a 40% deposit for existing investment properties and a 20% deposit for brand-new.

Deciding which property type you’ll invest in significantly impacts what you can afford.

Let’s continue with the example from above to illustrate the point.

You’ve got $300k in useable equity to use as a deposit. If you invest in existing properties, you can buy investments worth a maximum of $750,000.

Take that same $300k and buy new properties, and you can now invest a maximum of $1,500,000.

So, investing in brand-new properties means you can afford to purchase more properties quickly.

How do I access dead-equity in my home to start investing?

There are two ways to access dead-equity.

The first is to go to the same bank that holds your existing personal mortgage.

This is the most straightforward way. You submit a mortgage application, and the bank will give you preapproval to purchase a property up to a specific value.

The benefit of going to your existing bank is that it is simple. You get the approval and buy the investment property.

But this approach does have downsides. Your properties are generally less secure when you use one bank rather than two.

Why is it less secure if I only use one bank rather than two?

When you buy multiple properties through one bank, the mortgages on the investments are cross-collateralised.

That means each mortgage uses both properties as security.

If you default on either loan, the bank can sell both properties from underneath you.

But, if you use two banks and each has a different mortgage, the lenders can only force you to sell whatever property you defaulted on.

Using one bank also means if you sell an investment property and make some money, the lender can force you to use the proceeds from the sale to pay off debt, like your personal mortgage.

That’s why many investors will use this two-bank, split banking strategy.

How do I get access to the funds to invest when using split banking?

If you use a split-banking strategy, you need to turn the equity within your own home into cash to use it as your investment deposit.

The most common way to do this is by setting up a revolving credit against your owner-occupier.

In simple terms, this is a large overdraft that uses your home as security.

Once approved, you can move those available funds into a solicitor’s trust account as the deposit for your investment.

You can also access this equity by taking out a second mortgage against your home. However, that’s a less flexible way because you’re tied down to a set repayment schedule, and you generally can’t choose precisely when to access the funds.

I want to buy an investment property; what’s the next step?

If you’d like to start investing in property, your next step is to determine if you can meet the bank’s criteria and get a loan approved.

As a first step, check out this Do You Have What It Takes to Become a 1st-Time Property Investor? Quiz.

This quiz gives you a ‘yes’, ‘no’, or ‘maybe’ answer on whether you’re ready to invest, along with a summary of where you’re at financially right now.

Alternatively, you can get started by talking to a mortgage broker to get preapproval with a bank.