Understanding Home Equity to Buy a Second Home

Queanbeyan homeowners can often use the equity in their current home to fund the deposit on another property. The amount you may be able to use is generally 80% of your home's value minus what you still owe, subject to lender approval. That figure is smaller than the gap between your home's value and your loan, and it shapes every decision that follows.

How Does Home Equity Work When You Buy a Second Home?

Equity is your home's current value minus your loan balance. Usable equity is generally the amount that takes your total borrowing against your home up to 80% of its value. Calculate it as 80% of the home's value minus what you owe, and it is the part of your equity a lender may let you borrow against. The lender decides the value, so a valuation that comes in lower than you expected reduces what you can borrow. Your lender or broker may require a formal bank valuation to work out your usable equity.

The 80% line matters because borrowing more than 80% of value may mean paying lenders mortgage insurance. Queanbeyan is a commuter town about 15 kilometres from Canberra, but each home is still valued on its own features, so a broker's estimate is only a starting point until the valuation arrives.

Usable Equity Example: Funding a 20% Deposit

A homeowner whose loan is about half of their home's value has usable equity of about 30% of that value, because 80% minus 50% leaves 30%. That can be enough to buy a second property without lenders mortgage insurance.

Consider a Queanbeyan owner in this position who wants to buy a property priced about the same as their current home. They need a 20% deposit to avoid mortgage insurance, plus money for stamp duty, legal fees and other buying costs. Their broker structures two loans. One is an equity loan against the existing home for the deposit and costs. The other is a new loan for the remaining 80% of the purchase price, secured against the new property.

The outcome is that the full 20% deposit and the buying costs are covered by the 30% of usable equity, with some left over. That leftover amount is worth keeping. If you have no funds outside your home equity, it is risky to use every cent of your usable equity. The owner still needs a lender to approve the repayments on both loans, which is why checking your borrowing capacity comes before making an offer.

Top-Up or Separate Equity Loan: Choosing a Structure

You can release equity by topping up your existing loan or by opening a separate loan secured against your home. A top-up lifts your existing loan limit up to the 80% mark and releases the funds, while a separate loan is a standalone account kept apart from your existing mortgage.

A separate loan keeps the borrowing for the new purchase distinct from your home loan, which makes the records clearer. The trade-off is that it may mean another set of fees and another loan to manage. Cross-collateralisation is a third approach, where your existing property is bundled with the new loan as security. It ties both properties together, which can limit your options if you later want to sell or refinance only one of them. Our home loans page covers how these structures fit different situations.

Repayments on the Equity Portion at an Illustrative Rate

The equity you release is a new debt, and its repayments add to your existing loan. The figures below use an illustrative rate of 6.75% p.a. and are not a quote.

As an example, suppose you release $100,000 for the deposit and costs. Interest-only repayments at 6.75% would be about $563 a month, or $6,750 a year, and the $100,000 balance would not fall. Principal and interest repayments over 30 years at the same rate would be about $649 a month, and the balance would reduce each month.

The interest-only option costs less each month but leaves you owing the full $100,000. If an interest-only period ends, repayments are then spread over a shorter remaining term and rise accordingly. Rates also change over time, so test the numbers with a home loan calculator and leave room for repayments to rise.

Second Home or Investment Property: How Lenders Assess Each

Lenders assess a second home and an investment property differently, and your plan for the property changes the loan. For a second home, lenders assess both loans and your living costs. For an investment property, lenders may count expected rent, and rates can differ.

If you plan to buy an investment property, an investment loan may be the right product. Rental income can help with serviceability, but costs such as property management fees, insurance, maintenance and vacancy buffers still need to fit your budget.

Tax can also differ between the two uses. Interest on money borrowed against your home to buy a property that is rented out is generally deductible. That does not make the loan repayments themselves deductible, and the outcome depends on your circumstances, so speak with your accountant before you borrow.

If you want pre-approval before you start looking, a broker can also compare how different lenders treat your existing home, your income and the new property. Our Queanbeyan mortgage broker team can run that comparison for you. If you are unsure how much equity you hold, a loan health check is a sensible first step.

Frequently Asked Questions