Guide: using equity to buy a second property, renovate, or invest

In most cases, due to LVR restrictions, you need to hold a minimum of 20% equity in your home at all times, and 30% if you’re an investor (there are some exceptions to this rule, but in general, it’s best to work under these assumptions). 

That means you can borrow against any equity you hold, over and above 20%.

For example, if you had a home worth $1 million and a $700,000 loan, you’d have $300,000 equity and the useable equity equation would look like this:

• Useable equity = $300,000 - $200,000 

• So useable equity = $100,000

Think of usable equity as extra borrowing (secured against your property) available should you want it. 

Yes, you can use equity as a deposit to buy a second property in most cases. This is a great way to buy an investment property or bach, because if you have enough equity, you won’t need to put any cash down at all.

Keep in mind, LVR rules apply for second houses, baches, and investment properties too. You’ll generally need a 20% deposit to buy a new build, whether it’s an investment or a home, 20% to buy an existing build as your home, and 30% to buy an existing build if it’s an investment.

Note: if you don’t have enough cash or equity to buy a second home it’s still worth a try and you may be able to buy with a smaller deposit. Your best bet is to speak to a mortgage broker, as they’ll be able to tell you what’s possible and connect you with the right lenders. 

You can do anything you want with your equity in most cases (as long as it's legal and within reason). But again, it’s important to remember that unlocking equity is another way to say increasing your borrowing.

Before you do, make sure you can afford the increased repayments. It’s also better to put the money into investments or assets that will appreciate if you can (since you’ll be paying interest).

If you plan to build a new home, one way to finance the property without selling your existing home, could be to unlock equity. Doing this could potentially enable you to start and finish the build, while staying in your current home, if you can afford to service two loans. 

Ask your lender about what’s possible – you may need a bridging loan to make it work. 

Most Kiwi parents don’t have the cash to give their kids a deposit outright in cash, but most parents do have some equity. Unlocking that equity is a great way to provide a cash house deposit for the younger generation. 

Read more about how parents can help kids buy a house.

If your home needs a little work, you could borrow against your equity to fund the renovations. If you do it right, renovating could add value to your home and increase your overall equity – just be sure your renovations don’t cost more than the value they add.

You don’t need to use your borrowing to fund property related projects. In fact, you can use it for almost anything you’d like, as long as the lender approves. You could use it to invest in your business, buy a business, buy a caravan or a boat, a new vehicle, or go travelling. 

With that said, you should always use caution. Most financial advisors will tell you that you should only ever borrow to buy appreciating assets that may make you money, like investment properties, renovations, or businesses. We strongly encourage you to think twice about financing other items, and to speak to a financial adviser before you increase your borrowing for any reason.