Own your house outright and want another loan?

Buying a property with a home loan typically means using the property's value to secure the loan; a practice called “mortgaging” your home. But it's also possible to use the value of your property as collateral on another loan, provided you fulfil the eligibility criteria and have enough usable equity available.

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Owning your house outright can provide you with substantial equity, which some people use to secure financing for another property purchase.

If you meet the lender's eligibility criteria and have sufficient usable equity, it's possible to use your current home's value to help finance the purchase of a second property, whether for investment or personal use. This approach can help you avoid the need for a large cash deposit by using some of the equity in your fully-owned home as collateral or security for the new loan.

However, it's important to carefully consider your options and consult with a financial professional to understand the potential risks and benefits before proceeding.

When a bank or similar financial institution lends you money, they’re taking a risk that you may not pay them back. The higher a lender feels this risk is, the more the lender may charge in interest and fees on the loan.

To reduce this risk—and potentially lower the cost of your loan—you can offer the lender security or collateral, such as using your house as collateral for the loan. This collateral is a valuable asset that the lender can legally repossess and sell if you default on your repayments, helping them recover their money.

Most home loans are secured by the value of the property being purchased, but it’s also possible to use an existing property as collateral. This could mean using your house as collateral for a loan when purchasing another property. Many car loans are also secured by the value of the car you’re buying. For some credit products such as personal loans, it’s possible to use a separate asset as collateral in order to help reduce your interest charges. This could be a cash in a term deposit, assets such as shares, valuables such as jewellery or fine art, or the value of a car or the equity in a property.

Equity is the name for the percentage of your home that you own outright, and doesn’t have a mortgage owing on it. A fast way to find equity is to use this formula:

Current value of your property – Remaining mortgage principal balance = Equity

Making extra repayments on your mortgage can help to quickly lower your mortgage principal and increase your available equity. Also, if your property’s value has risen since you first purchased it, you may find you have more equity available than you expect after a valuation is completed.

Keep in mind that not all of the equity in your property can be used as collateral, as part of it will be required to secure your current mortgage. If more than 80% of your property’s value is being used to secure finance, your lender will likely take out a Lender’s Mortgage Insurance (LMI) policy, which you, the borrower, will likely need to pay for.

If you’re considering using your house as collateral for loan purposes, understanding your available equity can help. You can find your usable equity using this formula:

80% of your property’s current value – Remaining mortgage principal balance = Usable equity.

For example, if your property is worth $500,000, and your mortgage has an outstanding balance of $300,000, you have $200,000 in equity. But because 80% of the property value is $400,000, that leaves only $100,000 of equity available for use as collateral on other loans.

How can you use equity?

You can use the equity in a property as collateral on a new loan. You may be able to apply for a mortgage on an investment property, using the equity in your current property in place of a traditional deposit.

When considering buying an investment property using your equity, a common benchmark is to look at properties with a purchase price of around four times your usable equity. For example, if you had $100,000 in usable equity, looking at properties priced around $400,000 may allow your equity to cover a deposit on the property, as well as upfront costs such as fees and stamp duty.

You may also be able to apply for a line of credit with a maximum limit based on your equity, which functions much like a credit card. In a home equity loan like this, you’d only be charged interest on the amount you’ve borrowed and would get to enjoy some flexibility around your repayments. This flexible access to money could help you to manage the costs of a renovation to your property, or go on a holiday, or invest in assets such as shares.

Keep in mind that borrowing money is always a risk, which could affect your financial future. Before putting your equity to work, consider seeking independent financial advice and/or contacting a mortgage broker.

When you already own a property and consider borrowing against it to finance the purchase of a new one, it’s important to weigh the benefits and risks carefully. This strategy allows you to leverage the equity you've built up in your existing property as security or collateral, which can help you avoid a large cash deposit. However, while this approach offers potential advantages, it also comes with significant risks that you must consider.

Borrowing against your current property unlocks the equity you've accumulated over time, providing you with the financial flexibility to use it as a deposit for a new property. This can be particularly advantageous if you’re looking to expand your property portfolio without needing substantial upfront cash. Moreover, the equity you unlock can be used for various other purposes, such as covering financial emergencies, funding renovations, or even financing a holiday.

Investing in a second property using equity from your existing home could also be a way to grow your wealth. The new property might generate rental income, providing an additional revenue stream, and could appreciate in value over time, further increasing your wealth. However, despite these potential benefits, using your current home as collateral to secure a loan for a new property carries risks.

The most significant risk is the possibility of defaulting on your loan repayments if interest rates rise or your financial situation changes. In the worst-case scenario, this could lead the lender to foreclose on both of your properties. Additionally, property values can fluctuate, and if the market declines, you could end up with negative equity, meaning you owe more on the loan than your properties are worth. This is particularly risky if you need to sell the property during a market downturn.

Furthermore, while borrowing against your existing property may provide immediate financial benefits, it also increases your overall debt burden. This additional debt can strain your finances, especially if interest rates rise, making loan repayments more difficult to manage.

Before deciding to borrow against your existing property to finance a new one, it’s crucial to fully understand the financial implications and ensure you’re prepared for the risks involved. Consider speaking to a mortgage broker to determine whether this strategy aligns with your long-term financial goals.