How to use your home equity to buy rental property

Has your home been building up equity? Find out how you could leverage it to start an investment portfolio.

3 minute read

If you’re looking to start building an investment portfolio, taking out a home loan using equity in your existing property can be one way to do so – without having to save a hefty deposit. BNZ Home Loan Partner, Sid Bhalla, explains how to build equity in your home, and how you could use it to your advantage.

Home equity at a glance

Sid explains home equity as the difference between your home’s value and the amount you still owe against it. Put simply, it’s how much of your home you actually ‘own’.

There are two ways to build equity.

1. Your home’s value increases, either through market changes and/or home improvements.
2. By paying off your principal (amount you’ve borrowed) or reducing the credit limit (borrowing limit) of your home loan over time.

Using your home’s equity to buy an investment property

Depending on your financial circumstances, your bank may agree to let you borrow against your home’s equity, and use it as a deposit for buying an additional property. 

If you’re interested in using your equity for investment property, there’s a bit of research to be done first, including:

• the current market value of your property
• exactly how much you still owe the bank
• what the market in your area is doing
• the current market value of the investment property 
• how much you want to buy it for
• how much deposit you’ll need
• your ability to service multiple mortgages
• any potential rental income on the additional property.

The next step is to talk to the bank. “We’ll sit down with you and look at the numbers, go through all the details, and help you decide what’s possible,” explains Sid.

Your mortgage options

Just like a regular mortgage, everyone’s situation will be different. For example, if you’re buying the property with the idea to on-sell it in just a few years’ time, you might want to choose an interest-only option.

Sid says this option is popular with property investors, as it can be a good way to make sure your rental income covers the home’s mortgage repayments. “Just remember that as a property investor, you may pay slightly higher interest rates,” says Sid. “It’s important to do all the checks before signing anything. Talk to your bank before committing to something that will have an impact on your finances.”

If now feels like the right time to buy an investment property, using your home equity could be a great way to get your foot in the door. Just make sure you have a clear understanding of the market, your home’s current value, and your financial situation. To learn more about whether you could use your home to purchase another, talk to one of our experts.

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This material is for general information purposes only and does not constitute, and is not intended as personalised financial advice or as a replacement for legal advice. BNZ strongly recommends you seek advice specific to your personal financial or legal situation from a qualified adviser. Neither BNZ nor any person involved in the material accepts any liability for any direct or indirect loss or damage arising out of the use of, or reliance on, all or any part of the content.

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