How Much Equity Do I Need to Buy an Investment Property?

Savvy helps you work out how much equity you need to buy an investment property and what other costs may be involved.

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, updated on August 8th, 2023       

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When you’re thinking of buying an investment property, the question of how much equity you need before you embark on this journey looms large.  Here Savvy looks into the subject of equity to buy an investment property and considers the other costs involved too.  Savvy can help you save money by comparing financial products so you get to choose the one that’s just right for you.

Will I still need to provide a 20% deposit to buy an investment property?

In most cases, yes – investment property loans work on the same basis as normal home loans: lenders usually require a 20% deposit and will only loan around 80% of the value of the property to be purchased.  This 20% can be in the form of a cash deposit or you can use the available equity in your existing home as security for your second mortgage.

If you want to know how much usable equity you have in your home, multiply the value of your home by 0.8 (representing 80% of its value) and subtract your outstanding mortgage debt from that amount.  This will give you the available equity you’ve got which you may use to secure a loan on your second property.  For example, if your house’s value was $700,000 and your remaining home loan debt was $350,000, your usable equity would be:

  • $700,000 x 0.8 = $560,000
  • $560,000 – $350,000 = $210,000

What other costs will be involved in buying an investment property?

As well as the purchase price of your investment property, you should also consider the following costs which you will incur:

  • Stamp duty – use Savvy’s stamp duty calculator to find out how much stamp duty you’ll have to pay on the purchase of your investment property
  • Loan establishment fees – allow between $150 and $800
  • Building inspection – between $600 and $800
  • Pest inspection – around $500
  • Home and contents and landlord insurance – will depend on the type of property you’re buying, its value and if you’re supplying white goods and furniture with your rental
  • Property letting fees – which are usually the equivalent of at least one week’s rent
  • Advertising costs for tenants – the cost will depend on where and how you advertise for tenants
  • Ongoing property management fees – if you intend to appoint a property manager to handle your investment property on your behalf, budget to pay between 4% and 10% of the rental return to your property manager

Do I need to stay with the same lender to get a second mortgage?

In theory, you don’t have to use the same lender for your home loan and your investment property loan, but it’s generally easier to do so.  The reason for this is that if you decide to go with a second lender for your investment property loan, that lender will take second place to your first lender when the property is sold.  This means the first lender will have to be paid in total before the second mortgage is paid off. 

Because lenders have to agree to this ‘pecking order,’ they’re reluctant to play second fiddle and so are far more cautious when approving loans when another lending institution already holds a mortgage over the one property.  For this reason, it is usually far less time-consuming, and less costly, to remain with the same lender for an investment loan using the equity in your existing home.  However, it’s important to compare your finance options with Savvy to ensure you get the best deal for your situation.

Frequently asked questions about buying investment property using equity

Can I buy an investment property with less than a 20% deposit? 

If you’re thinking of using equity to buy property, but your equity doesn’t amount to 20% of the cost of the property you wish to purchase, you still may be able to go ahead with the purchase if you pay Lenders Mortgage Insurance (LMI). This is an insurance which protects the lender if you should default on your loan, but it’s the borrower who is required to pay the LMI premium, which can amount to thousands of dollars.  However, LMI is one way to buy an investment property with less than a 20% deposit.

What does cross collateralisation mean?

This finance term means to use more than one property as security for a home loan.  For example, if you are buying a property as an investment, your lender may ask you to use some of the equity in your existing home as security for your loan to buy your investment property, in which case the lender would use both properties as collateral for the loan.  This is a very common way of using equity to buy property in Australia.

If I have a second loan on my property, what happens if I want to move house?

You will not be able to sell your house until you’ve made alternative arrangements with your lender to provide them with additional security to support your second loan, so they can release their interest in the home you wish to sell.  By the time you move, you may have sufficient equity in your investment property to not need additional security, or you may have other investments or property you can offer as security so your original mortgage can be released.

Can I have a variable rate loan and a fixed rate loan using the same property as equity?

Yes – if you’re using the equity in your existing home as security to purchase an investment property, you’ll be taking out a separate mortgage for your second property.  As such, you’re at liberty to choose whichever type of loan is most appropriate for your personal financial circumstances.  You can have a variable rate for your home loan and a fixed rate loan for your investment property loan, or you can split your investment property loan into two and have one portion on a variable rate, and another on a fixed interest rate.

Can I apply for pre-approval to check if my lender will allow me to use my equity to buy an investment property?

Yes – it would be a good idea to seek pre-approval from your lender so you’re aware of how much they’re prepared to loan you.  Remember that home loan pre-approval does not guarantee that a full loan application will be approved – it's just an indication as to how much a lender may be prepared to loan given the preliminary figures you provide.

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