A homeowners guide to borrowing against equity to buy a second property

December 7, 2022

If you’ve already got a property under your belt, chances are you’ve benefited from the exponential rise in property prices over the past few years. Take this stat: according to CoreLogic, median property prices in Australia rose by an impressive 22.1% in 2021.

For homeowners, rising property values mean you’ve likely seen a significant jump in what your current home might be worth. If you’re thinking about selling and buying elsewhere, the wealth you’ve created in your current property can fast-track your next purchase. And unlike first-time buyers, you don’t need to worry about saving up a huge deposit to make your next property move.

Instead, it could be worth using your existing property equity to buy your next home (or even upsize or downsize to a property that’s a better fit for you). To help you weigh up your options, let’s run you through how equity works and how you can access the value in your current home to help you secure the keys to your next property. 

What is equity?

Let’s start with the basics. In a nutshell, equity is the difference between how much your property is worth and how much you still have remaining on your home loan. 

Take this example: let’s say your property is valued at $1.2 million and you still have $600,000 to pay back on your loan (including interest and fees). That means the equity you have built up in your home is $600,000. 

Why is this important to know as a homeowner? Well, you can actually borrow against this equity for your next property purchase. That’s because equity can be used as a deposit or security to secure a new home. 

What are the benefits of tapping into your home’s equity?

The biggest benefit of borrowing against existing equity to buy a second home is this: it helps speed up your next property purchase. 

In more specific terms, here are the key benefits of tapping into equity to make your next property move:

  • Equity removes the need for a cash deposit: rather than waiting years to save up thousands of dollars, homeowners can draw on the equity in their existing home to fund the deposit for their next home purchase.

  • Using equity can speed up the journey to buying your next home: with a deposit ready to go, tapping into equity enables homeowners to move faster and secure their next home or investment property on a fast-tracked timeline.

  • Tapping into equity allows you to buy your new property first before selling: plus, you don’t necessarily need to sell your current property first. With a bridging loan, you can draw on the equity in your current property to fund your next purchase and sell on your terms after the purchase.

How does equity work?

There is a catch with borrowing against existing equity to buy a second property: you won’t necessarily be able to access the entire amount of equity in your home. 

Why? Because lenders will be looking at the usable equity in your home. Usable equity is calculated using a formula known as a loan-to-value ratio (or LVR for short). Essentially, lenders will look at the value of your current home and how much you still have remaining on your loan to figure out your LVR and your home’s usable equity.  

Plus, LVR is a helpful way to figure out if you can comfortably afford a loan, even if the property price shifts down slightly. 

Here at Bridgit, we help homeowners secure their next property before selling their current home using a Bridgit bridging loan. We offer an LVR of up to 75% of the combined value of the property you’re buying and the property you’re selling to help get you moving. 

Let’s run you through a worked example to show how we can help you access the equity in your home to fund your next property purchase:

  • Say your current home is valued at $800,000 and the property you are buying is valued at $600,000. The combined value of these properties is $1.4 million.

  • However, you still have $200,000 remaining on your current home loan.

  • Since we’ll let you borrow up to 75% of these combined property values ($1.05 million), your potential usable equity = $1.05 million - $200,000 = $850,000

If you’re looking for ways to boost the equity you have in your current property, there are stacks of practical steps you can take, including:

  • Adding value to your property through strategic renovations and repairs.

  • Make extra loan repayments or increase your repayment frequency to pay down your debts sooner. 

How to access equity 

The usable equity in your current home can be used to finance value-adding renovations or be the way in for your next property purchase. 

So, what steps do you need to take to access equity?

  • Calculate the usable equity in your property: first up, you’ll need to figure out how much equity you actually have to play with. Non-bank lenders like us (Bridgit) streamline this process by providing a pre-approval offer outlining an estimate of your usable equity, derived from the numbers you provide when submitting the application (with no fees to apply and no obligation to follow through).

  • Assess your finance options: now it's time to consider what type of loan is right for you. 
  • If you’re looking to use equity to switch to a more competitive loan or interest rate, you might be able to leverage this equity and refinance to score more affordable loan repayments.

  • You can consider buying a new property before selling your current home by harnessing your usable equity and securing a Bridgit bridging loan. Our easy online application process can help you secure same day approval (zero paperwork required) to help you buy now and sell later.

  • Consider which loan product meets your needs: when weighing up your loan or lender options, it’s important to compare products based on their interest rates, fees and extra features (like whether or not they offer things like a redraw facility). 
  • Here at Bridgit, we offer an initial 3 month interest-free period with a set-up fee  included in the total loan amount. That means you can rest assured that you won’t be hit with additional fees once your loan has been funded. 

When it comes to using equity to buy your next property, this can be a smart approach to speed up your next property move. The key to making the most of your property’s equity is to find a lender and loan option that gives the flexibility and control to move on your own terms and secure approval quickly and easily. 

Here at Bridgit, we help homeowners (like you) use equity to fund their next property purchase. Our easy online application process can give you same day approval, no monthly repayments and three months interest-free. Interested? Apply now for a Brigit bridging loan. 

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