In fact, the equity you have in your current property may enable you to buy one, two or even more residential investment properties which grow in value over time and increase your net worth as a result. It's like the ad says..."equity mate".
Equity can be defined as the difference, in dollars, between the current market value of a property and the amount owing on the property. This equity can be used in a number of ways, but we're going to look specifically at how it can be used to buy an investment property.
Let's look at an example:
A couple own a home which is worth (in today's market) $295,000. They also have an existing loan on the home of $123,000. This means their "equity" is $295,000 - $123,000 = $172,000.
The next thing we need to determine is whether or not our couple can afford to borrow (using the existing equity in their home) to buy an investment property.
Usually, a bank will lend around 75% of the value of a property without the borrower having to pay mortgage insurance, so we will use this level of borrowings in our example.
75% of the $295,000 is $221,250, but we need to subtract the existing loan ($123,000) from this amount.
That leaves us with $221,250 - $123,000 = $98,250 which could be used as a deposit to buy an investment property.
Our couple could then also borrow 75% of the value of the investment property they want to buy. If the property is worth $285,000, then they could borrow $213,750, plus the deposit of $98,250 we determined they could borrow from their existing home, giving them total buying power of $312,000.
This means, as long as the bank can establish our couple can service the loans based on current income, as well as income from the new investment property and potential tax savings, they can go out and buy $312,000 worth of property.
This would mean they would own $580,000 worth of property with total borrowings of $123,000 + $98,000 + 213,750 = $298,000. If these properties increase in value over the next 12 months, by say 7%, then they have added $40,600 to their net worth in a year.
So you can see the power of using existing equity to grow your property portfolio and your personal wealth over time.
Of course, before contemplating any investment in a property we strongly recommend that you seek advice from your accountant or other financial advisors.