How to Use Home Equity to Invest in Australia

What Is Home Equity?

Home equity is the difference between the current market value of your property and the amount you owe on your mortgage. For instance, if your home is worth $500,000 and you owe $300,000, the equity in your home would be $200,000. Home equity can increase steadily as you make regular mortgage payments, and if your property’s value appreciates at an average rate of 5% per year.

The more equity you build, the more you can borrow against, which can be a significant advantage when you want to invest in property, shares, or other opportunities. Home equity is essentially an asset that can help you grow your wealth when used strategically.

What is Usable Equity and How Is It Calculated?

Usable equity refers to the portion of your home’s equity that you can borrow against. While your home may have substantial equity, lenders typically only allow you to access up to 80% of your home’s value. This is known as the Loan-to-Value Ratio (LVR). For example, if your home is valued at $600,000 and you owe $350,000, you can potentially borrow up to 80% of the home’s value ($480,000).

After subtracting your existing mortgage, your usable equity would be $130,000. This is the amount you could use for investing in various assets. However, it's essential to note that not all equity is available to you, as lenders consider your financial situation and other factors when determining your borrowing capacity.

Example Calculation

• Home Value: $600,000
• Mortgage Owed: $350,000
• Available for Borrowing (80% LVR): $480,000
• Usable Equity: $480,000 − $350,000 = $130,000

How to Use Home Equity to Invest

After determining how much usable equity you have, consider your financial goals, risk tolerance, and preferred investment strategy, whether it’s property, stocks, or other assets.

Here are the most common ways you can use your home equity to invest:

1. Invest in Property

Using your home equity to purchase an investment property is one of the most popular strategies in Australia. The key benefits of property investment include potential capital growth and rental income. By borrowing against your home equity, you can use the funds as a deposit for an investment property, allowing you to build a property portfolio that generates passive income.

2. Invest in Shares or Managed Funds

If property investment isn’t your preferred option, using home equity to invest in shares or managed funds can be a great way to diversify your portfolio. Whether it’s individual stocks, exchange-traded funds (ETFs), or a broader managed fund, this approach gives you access to higher returns with more liquidity than property.

3. Contribute to Your Superannuation

Boosting your superannuation is another way to use home equity to your advantage. By making voluntary contributions, you can grow your retirement savings while benefiting from tax advantages. This strategy is especially helpful if you’re looking to maximise your retirement funds and minimise your taxable income.

4. Start a Business

If you’ve always dreamed of starting your own business, home equity can provide the necessary funds to get started. While this is a higher-risk strategy, it can be highly rewarding if you have a solid business plan and experience. Accessing home equity to fund a business allows you to pursue your entrepreneurial goals without needing to sell your property or seek other forms of financing.

If you’re ready to take the next step in property investment, our Investor Loans can provide you with the funding you need to turn your equity into a profitable asset.

Pros and Cons of Using Home Equity for Investment

Using home equity to fund investments has its advantages, but it’s not without risks. Understanding both the pros and cons will help you make a more informed decision.

Pros

• Access to Capital: By borrowing against the equity in your home, you can access a large sum of money without needing to sell your property.
• Lower Interest Rates: Loans secured by property tend to have lower interest rates compared to unsecured loans, such as personal loans or credit cards.
• Tax Benefits: Interest on loans used for investment purposes is often tax-deductible, particularly if the funds are used for income-generating investments, such as property or shares.

Cons

• Increased Debt Burden: While borrowing more money can enable you to invest, it also increases your financial obligations. It’s essential to ensure you can comfortably manage the new repayments, especially if your investments do not generate income immediately.
• Risk of Losing Your Home: Since your property is used as collateral, failing to meet your loan repayments could put your home at risk of foreclosure.
• Market Volatility: Both the property and share markets are subject to fluctuations, and an unexpected downturn could reduce the value of your investment, leaving you in a situation where you have negative equity.

Example Scenarios

Let’s explore some real-life scenarios to see how using home equity for investment can work.

Example 1: Buying an Investment Property

John owns a home worth $700,000 and has a mortgage of $400,000. His usable equity is $160,000. He decides to use $120,000 as a deposit on an investment property, with an additional $40,000 for stamp duty and other costs. By doing so, he successfully purchased a $600,000 investment property.

Example 2: Investing in Shares

Sarah’s home is valued at $500,000, and she owes $250,000 on her mortgage. With $150,000 in usable equity, Sarah decides to invest $100,000 in Australian shares. Over time, the shares appreciate, providing her with a return on her investment while she continues to pay down her mortgage.

Tax Considerations and ATO Guidelines

When you use your home equity for investments, you need to be aware of the tax implications. The interest on investment loans is generally tax-deductible, meaning you can claim back the interest payments on your property or share investment loans, provided they are used for generating income.

Additionally, any capital gains made from the sale of an investment property may be subject to capital gains tax (CGT). However, holding an asset for more than 12 months can offer a CGT discount.

It's essential to keep your investment-related finances separate from your personal expenses and maintain detailed records to ensure compliance with ATO guidelines. You may also wish to consult with a tax professional to understand the specific tax implications for your investments.

Who Should (and Shouldn’t) Use Equity to Invest?

Using home equity to invest can be a great strategy for some—but it isn’t suitable for everyone. Consider your overall financial position before moving forward.

Ideal Candidates

• Homeowners with significant equity and stable, predictable income.
• Individuals who are looking for long-term wealth creation and are comfortable with the risks.
• Those with a clear investment plan and the financial buffer to handle potential losses.

Cautionary Advice

• Individuals with high levels of personal debt should exercise caution, as taking on more debt can exacerbate financial stress.
• Homeowners nearing retirement may want to avoid using home equity to invest, especially if they don’t have time to recover from potential losses.
• If you don’t have an emergency fund, consider keeping a portion of your equity reserved for unexpected expenses, as using all of it for investment could leave you financially vulnerable in case of emergencies.

Stryve’s Expert Guidance on Equity Investing

At Stryve Finance, we specialise in helping Australians unlock the power of their home equity to invest smartly. Our expert team can help you:

• Assess your available equity and understand your borrowing capacity.
• Explore the best lending options across Australia’s major banks.
• Create a personalised investment strategy that aligns with your goals.
• Provide ongoing support as your investment grows.

If you’re ready to make your home equity work harder for you, reach out to us today for a free consultation. Our team will help guide you through the process and ensure you’re on the right track toward successful investing.

FAQs

1. Is using home equity to invest a good idea?

Using home equity to invest can be a great idea if you have a solid strategy and understand the risks. It allows you to leverage your existing assets to build wealth, but there’s always a level of risk involved.

2. Can I use equity to buy shares in Australia?

Yes, home equity can be used to buy shares in Australia. Many Australians use equity to diversify their investments, with stocks and ETFs offering greater liquidity compared to property.

3. How much equity do I need to invest in property?

Typically, you need a deposit of 20% to avoid paying Lenders Mortgage Insurance (LMI). Your usable equity will determine how much you can borrow for the property.

4. Is interest on equity loan tax-deductible?

Yes, the interest on loans used for investment purposes is generally tax-deductible in Australia, provided the funds are used for income-generating assets, such as property or shares.

5. What's the difference between equity release and refinance?

Equity release allows you to access the equity in your home through a top-up or line of credit, while refinancing involves changing your current mortgage to access more funds or lower rates.

Conclusion

Leveraging your home equity to invest can be a powerful wealth-building tool when done strategically. Whether you’re looking to purchase property, invest in shares, or contribute to your super, understanding your options and working with experts like Stryve Finance can help ensure a successful investment journey. Book a free consultation today, and let's start planning your next move.