Maximizing Home Equity to Grow Your Portfolio

For many homeowners, a house is more than just a place to live - it’s a valuable financial asset that can help build wealth over time. One strategic way to unlock its potential is by leveraging home equity, but it’s crucial to understand how it works, and the risks involved. This guide will walk you through the basics of home equity, how to access it, and its potential for investment opportunities. 

What Is Home Equity?  

Home equity is the portion of your home that you truly own. It’s calculated by subtracting your outstanding mortgage balance from the home’s current market value. For instance:  

• If your home is worth $800,000 and your remaining mortgage is $500,000, your equity is $300,000.  

Equity grows as you pay down your mortgage or as your property value appreciates. Significant equity gives you access to funds that can be used for other financial opportunities. However, it’s important to distinguish between equity and usable equity - the portion of your equity that lenders allow you to borrow against.  

Equity vs. Usable Equity  

Equity

Equity represents your total ownership in the home. The formula is simple:  

Equity = Current Market Value - Outstanding Mortgage Balance  

Example:  

• Home value: $800,000  
• Mortgage balance: $500,000  
• Total equity: $300,000  

Usable Equity

Usable equity refers to the portion of your equity that lenders permit you to access, typically up to 80% of the property’s market value. This limit helps safeguard lenders from risk. The formula for this is:  

Usable Equity = (80% of Property Value) - Outstanding Mortgage Balance  

Example:  

• 80% of $800,000 = $640,000  
• Usable equity = $640,000 - $500,000 = $140,000  

In this case, $140,000 is the amount you could borrow to fund investments or other financial needs.  

The Power of No Cash Down  

Your home equity can act as a deposit, reducing or even eliminating the need for upfront cash. Here’s how it works:  

• Lenders let you borrow against usable equity, typically up to 80% of your home’s value.  
• You can then apply this amount toward the deposit on your next property purchase.  

Example: Using Usable Equity to Buy Property  

You can leverage your usable equity as a deposit to purchase property, minimizing the need for out-of-pocket cash. The required deposit varies depending on whether you’re buying a new property or an existing property.  

1. Buying a New Property (Newly Complete or Off-the-Plan)  

For new properties, lenders generally require a 20% deposit, which can often be fully covered by your usable equity.  

Example:  

• Purchase price: $500,000  
• Required deposit: 20% of $500,000 = $100,000  
• Usable equity: $140,000  

In this scenario, you could use $100,000 from your equity for the deposit, leaving $40,000 available for other costs such as professional fees.  

2. Buying an Existing Property  

For existing properties, lenders typically require a higher deposit—around 30%—due to increased risk.  

Example:

• Purchase price: $500,000  
• Required deposit: 30% of $500,000 = $150,000  
• Usable equity: $140,000  

Here, you would need an additional $10,000 in cash to meet the deposit requirement.  

Key Considerations  

Using home equity is a powerful tool to grow wealth, but careful planning is essential. Keep these factors in mind:  

• Understand Access Limits: Equity is your total ownership, while usable equity is the portion you can borrow.  
• Deposit Requirements Vary: New properties typically require a 20% deposit, while existing properties often demand 30% or more.  
• Account for Extra Costs: Consider additional expenses like professional fees.  

To Sum Up 

Leveraging home equity to invest in property with little to no cash upfront can create exciting opportunities for wealth building. New properties, with their lower deposit requirements, make this strategy even more accessible. By tapping into your home’s usable equity, you can expand your investment portfolio and grow your financial future. 

Take the first step in your investment journey

Book a 15-minute phone call with Hamish Cowan, the Founder and Director at equiti