Using Equity to Build Wealth: The Benefits and Risks

For many Australians, the equity in their home is their single largest asset. As property values have risen significantly over the past decade, homeowners are sitting on substantial equity that can be unlocked and put to work. But using equity to build wealth is a strategy that deserves careful consideration.

What Is Usable Equity?

Equity is the difference between your property's current market value and the amount you owe on your mortgage. However, lenders won't let you access 100% of it. Most lenders will allow you to borrow up to 80% of your property's value without paying Lenders Mortgage Insurance (LMI) — your usable equity is the gap between your current loan balance and 80% of the property's value.

Example:

• Property value: $900,000
• 80% of value: $720,000
• Current loan balance: $450,000
• Usable equity: $270,000

How Can You Use Equity?

Investment Property Purchase

The most common use of equity is as a deposit for an investment property. Rather than saving cash for a new deposit, you use the equity in your existing home as security. This can accelerate your ability to build a property portfolio significantly.

Renovation and Value-Adding

Accessing equity to fund renovations can be a high-return strategy if the work adds more value than it costs. The key is focusing on value-adding improvements rather than purely lifestyle upgrades.

Shares and Managed Funds

Some investors use equity to fund share portfolio investments. This strategy — sometimes called debt recycling — can convert non-deductible home loan debt into potentially tax-deductible investment debt. It requires careful structuring and professional advice.

The Risks

Using equity is not without significant risk:

• You're leveraging your family home: If your investment performs poorly and you can't service the additional debt, your primary residence is at risk
• Higher total debt: Accessing equity means taking on more debt — your total exposure to interest rate movements increases
• Concentration risk: Investing in more property concentrates your wealth further in one asset class
• Serviceability: Lenders will assess whether you can service the additional borrowing — your income needs to support the increased debt load

Key Questions to Ask Before Accessing Equity

1. What is the investment, and what is my realistic return expectation?
2. Can I comfortably service the additional debt if interest rates rise?
3. What happens to my financial position if property values fall?
4. Have I spoken to both a financial adviser and a mortgage broker?

Loan Rocket brokers work with investors at all stages — whether you're accessing equity for the first time or expanding an existing portfolio. Let's model the numbers for your situation.