What Is Equity – And How Can You Use It to Buy an Investment Property
If you're a homeowner in New Zealand and considering building wealth through property, you’ve likely heard the term “equity” thrown around. But what is equity, how do you calculate it, and how can you use it to buy an investment property? Let’s break it down.
What Is Equity?
Equity is the portion of the property that you actually own, the difference between the market value of your property and how much you still owe on your mortgage. Simply put: Equity = Property Value – Mortgage Balance For example, if your home is worth $850,000 and your remaining mortgage is $550,000, you’ve got $300,000 in equity.
How Do I Calculate My Equity?
Start with a realistic market value of your home. You can get this via:
- A registered valuation
- A comparative market appraisal from your real estate agent
- Recent local sales of similar homes Then, subtract your current mortgage balance. The result is your total equity. Top tip: Only part of your equity is usually usable - this is called usable equity.
What Is Usable Equity?
Lenders typically allow you to borrow up to 80% of your home’s value (sometimes more, depending on your financial situation). Your usable equity is the amount between that 80% threshold and your current loan balance. Example:
- Property value: $850,000
- 80% of value: $680,000
- Mortgage balance: $550,000
- Usable equity = $130,000 This could be your deposit for an investment property.
How Can I Use Equity to Buy an Investment Property?
You can leverage usable equity as the deposit for a new property, instead of saving cash. Here’s how:
- Top-up your mortgage: You borrow against your equity to raise funds for the deposit.
- Use equity as security: Your existing home becomes collateral for a new investment loan.
- Buy with no extra cash: In many cases, buyers use equity to cover the full deposit and finance the rest through a separate mortgage.
It’s a popular strategy for growing a property portfolio without having to start from scratch financially.
Is Using Equity a Good Idea?
Using equity can be a smart move if the numbers stack up and the rental income supports the investment. But it’s not risk-free. You’re increasing your borrowing, so it’s important to:
- Run the numbers with a mortgage adviser
- Have a strong cash flow buffer
- Choose the right property in the right location
Equity is one of your most powerful tools as a property owner. By understanding and using it wisely, you could take the next step towards building long-term wealth through property investment.
Want to find out how much equity you have and what you could afford? Contact SM Property today – we’ll help you map out your next move.
