Mozo guides

How does equity work when buying a second home?

A financial advisor and their client meet at a table in a clean, contemporary office. The advisor points to a laptop screen and both smile.

If you own your home outright, or if you’ve been paying off your mortgage for a while, you’ve got home equity. Using your equity to buy a second property, either as an investment or as a holiday home, is a very lucrative way to expand your property portfolio. And the best part is, it’s relatively straightforward.

Home equity can be used to help with a deposit on another property, or as security for a home loan.

How much can you borrow against the equity in your home?

Banks rarely lend you the full value of your home, typically allowing you to borrow up to 80% of its value, minus your outstanding loan balance. This is known as ‘usable equity’. 

How to use equity to buy another property

1. Get a property valuation 

Before you can calculate your equity, you’ll need to know how much your current property is worth. You can do this by getting a property valuation, which is a professional appraisal of your home’s market value. 

2. Calculate your equity 

The next step is to calculate your home equity. You won’t need an equity calculator to do this. Instead, simply take the value of your property and subtract your home loan balance.

If you own your home outright, then your equity will be what your home is worth. 

Let’s use the following example: 

  • If your property is worth $750,000
  • And your outstanding loan is $300,000 
  • Your equity = property value - outstanding loan 
  • Therefore, $750,000 - $300,000 = $450,000 in equity. 

3. Increase your home equity (if you need to)

If you haven’t paid off much of your home loan, you won’t have built up much equity. So, if you want to increase your equity, the simplest way to do that is to chip away at your mortgage. 

What you want to do is decrease your loan-to-value ratio (LVR) by making extra repayments, or using an offset account to reduce the amount of interest that gets added to your loan balance. 

If you own your home outright, and you still want to increase your equity, then consider making improvements to your home, through renovations or extensions.

4. Compare investment home loans 

Once you’ve got your valuation and calculated your home equity, compare investment home loans. Keep an eye out for competitive interest rates, special offers, and any home loan features you might want. 

But before you apply for an investment home loan, it’s important to work out if your property will make returns.

Compare investment home loans

Plug in your loan amount and term to see your initial monthly repayment on a range of investment property loans in the Mozo database.

home with heart

5. Work out your potential returns 

If you want to buy a second property to rent out, you’ll need to do some quick maths with a mortgage repayment calculator to work out how much you need to repay each month. This will inform you of how much rental income you need from your tenants, and if it’s financially viable. 

On the one hand, you want to make a profit. On the other hand, you don’t want to be charging so much that nobody wants to rent it from you.

6. Apply for an investment home loan 

Once you’ve crunched the numbers and found a loan that works for you, it’s time to put in an application. From there, your lender will guide you through the steps to use the equity in your home to buy another. 

Get started by checking out the featured investment home loans below, or by doing a full database search here.

Compare investment property loans on Mozo - last updated 28 May 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
  • Flex Home Loan

    Investor, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.39% p.a. variable
    6.63% p.a.

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    Details
  • SMSF Home Loan

    LVR <70%

    interest rate
    comparison rate
    Initial monthly repayment
    6.99% p.a. variable
    7.00% p.a.

    Enjoy a competitive rate on your SMSF home loan with Loans.com.au. Available for refinancers only. No application fee and no settlement fee. No monthly, annual or ongoing fees. Unlimited extra repayments. Online access via Smart Money App. 30% deposit required.

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  • Flex Home Loan

    Fixed, Investor, Interest Only, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.49% p.a.
    fixed 2 years
    6.64% p.a.

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  • Back to Basics Special

    LVR<60%, Investment, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    6.43% p.a. variable
    6.44% p.a.

    Competitive variable for investors with no monthly account keeping or ongoing annual fees. Unlimited additional repayments & option to redraw additional repayments as cashback.

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  • Flex Home Loan

    Fixed, Investor, Principal & Interest, LVR 70-80%

    interest rate
    comparison rate
    Initial monthly repayment
    6.29% p.a.
    fixed 2 years
    6.65% p.a.

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Jack Dona
Jack Dona
RG146
Money writer

Jack is RG146 Generic Knowledge certified, with a Bachelor of Communications in Creative Writing from UTS, and uses his creative flair to cut through the financial jargon and make home loans, insurance and banking interesting. His reader-first approach to creating content and his passion for financial literacy means he always looks for innovative ways to explain personal finance. Jack's research and explanations have been featured in government publications, and his work is regularly featured alongside major publications in Google's Top Stories for Insurance.