Property Related
March 2025
Buying a second home can be an exciting milestone, whether you’re looking for an investment property, a holiday retreat or a home for a family member. One of the most common ways to fund the purchase is by leveraging the equity in your current property.
Home equity is the portion of your property that you own outright. The difference between its market value and what you still owe on your mortgage. Many homeowners use this equity as a financial tool to secure funding for a second property without needing a large cash deposit.
What Is Home Equity?
Home equity is the difference between the current market value of your property and the remaining balance on your mortgage. It represents the portion of your home that you own outright. To find out more, read this article – what is home equity?
Using Equity to Buy a Second Home
Once you understand how much equity you have, the next step is figuring out how to use it to fund a second home. There are several ways homeowners can leverage their equity, each with its own benefits and considerations.
1. Refinancing Your Existing Home Loan
Refinancing allows you to access your home’s equity by increasing your current loan amount. The extra funds can then be used as a deposit or, in some cases, to cover the full purchase price of a second home.
Your lender will revalue your property to determine the amount of usable equity available. Typically, you can borrow up to 80% of your home’s market value, minus any outstanding loan balance. The additional funds can either be incorporated into your existing mortgage or set up as a separate loan facility.
If your home is valued at $800,000, your lender may allow you to borrow up to 80% of its value, which amounts to $640,000. With an existing loan balance of $400,000, this leaves you with $240,000 in usable equity that can be applied toward purchasing a second home.
Pros of Refinancing
Refinancing often provides access to lower interest rates compared to other loan types, making repayments more manageable. It also simplifies loan management by keeping everything under a single mortgage, eliminating the need for additional loan setups. Additionally, depending on your income and financial position, refinancing may allow you to secure a larger loan, increasing your borrowing capacity.
Cons of Refinancing
Refinancing increases your mortgage balance, leading to higher loan repayments, which can impact your cash flow. It may also come with additional costs, including refinancing fees, valuation charges, and potential break costs of switching lenders. Additionally, borrowing too much could strain your finances, making repayments more challenging in the long run.
2. Home Equity Loan (Line of Credit)
A home equity loan, also known as a line of credit, allows you to borrow against your home equity but only withdraw funds as needed. This is a flexible option for buyers who don’t require a lump sum upfront but want access to funds over time.
How a Home Equity Loan Works
The lender establishes a revolving credit facility based on your home’s equity, allowing you to withdraw funds as needed, similar to a credit card. Interest is charged only on the amount you use, rather than the full approved limit.
However, there are some drawbacks to consider. Many home equity loans have variable interest rates, which can lead to higher repayments if rates increase. Since it functions like a credit facility, financial discipline is essential to avoid overspending and potential financial strain. Additionally, some lenders may impose stricter borrowing limits, making it more restrictive compared to refinancing.
For example, if you have $240,000 in usable equity but only withdraw $50,000 for a deposit, interest will apply only to the $50,000, giving you flexibility to access more funds later if required.
3. Cross-Collateralisation
Cross-collateralisation involves using both your existing home and the second property as security for a single loan. This strategy can sometimes allow borrowers to qualify for a larger loan or secure a lower interest rate, but it comes with significant risks.
How Cross-Collateralisation Works
With cross-collateralisation, the lender considers the combined value of both properties when assessing the loan. This allows borrowers to leverage equity from their first home to fund the purchase of a second property. Since the loan is secured by both properties, they become financially linked.
If your current home is valued at $800,000 with $240,000 in usable equity, and you’re purchasing a second home for $600,000, instead of taking out a separate loan, you can cross-collateralise both properties under one mortgage. The lender then uses both properties as security, enabling you to borrow the full amount required.
Pros of Cross-Collateralisation
Cross-collateralisation can increase borrowing capacity by allowing you to leverage the total value of both properties. Since the loan is secured against multiple assets, lenders may offer lower interest rates due to the reduced risk. Additionally, this approach eliminates the need for a cash deposit, as the equity in your first home can be used to cover the deposit for the second property.
Cons of Cross-Collateralisation
Cross-collateralisation comes with significant risks. Since both properties are linked, defaulting on repayments could result in the lender repossessing either or both properties. It also reduces flexibility, as selling one property requires lender approval, which can complicate future transactions. Additionally, refinancing becomes more challenging, as both properties must be reassessed, potentially limiting your ability to switch lenders or restructure your loan.
Which Option Is Best for You?
Each of these methods provides a way to use your existing home’s equity to buy a second property, but the best option depends on your financial goals, risk tolerance, and future plans.
Method | Best for | Key Considerations |
Refinancing | Homeowners are looking to consolidate debt and secure a lower interest rate. | Increases your mortgage repayments but may provide the most borrowing power. |
Home Equity Loan (Line of Credit) | Buyers need flexible access to funds over time. | Requires financial discipline, as it works like a credit facility. |
Cross-Collateralisation | Investors or buyers looking to secure a second home with minimal upfront costs. | Higher risk, as both properties are tied to the same loan. |
Before deciding, it’s always recommended to speak with a financial advisor or mortgage broker to assess which option aligns best with your financial situation.
Alternative Financing Options
If using home equity isn’t the right fit, there are other ways to finance a second home. Exploring these alternatives can help you find the best approach based on your financial situation.
1. Using Savings
If you have enough cash savings, using them for a deposit reduces borrowing costs.
Avoids additional debt and interest payments.
Requires careful budgeting to ensure sufficient funds for other expenses.
2. Guarantor Loan
A guarantor (usually a family member) offers their property as security for your loan.
Helps borrowers with low savings or limited equity.
Risks the guarantor’s property if repayments aren’t met.
3. Investment Loans
Designed specifically for buying an investment property.
May offer interest-only repayments to manage cash flow.
Requires strong borrowing capacity and investment strategy.
4. Shared Ownership
Buying a property with family or friends can reduce upfront costs.
Requires a clear legal agreement to outline ownership and financial responsibilities.
5. Vendor Finance
The seller lends you part of the purchase price, reducing the amount needed from a bank.
Less common but can work in private sales or off-market deals.
Each financing option has pros and cons, so it’s important to compare and assess which suits your financial goals and risk tolerance. Consulting a mortgage broker or financial advisor can help you choose the best path forward.
Steps to Access Your Equity
If you’ve decided to use home equity to buy a second home, the next step is to secure financing. Here’s a step-by-step guide to help you access your equity efficiently.
1. Get a Property Valuation
Your lender will need an up-to-date valuation to determine how much equity you can access.
The valuation considers market conditions, recent sales, and property improvements.
2. Calculate Your Usable Equity
Use the formula:
Usable Equity = (80% of Property Value) – Outstanding Loan Balance
This will give you an estimate of how much you can borrow without requiring Lenders Mortgage Insurance (LMI).
3. Speak to a Mortgage Broker or Lender
A broker can compare loan options and find the best structure based on your financial situation.
Lenders will assess income, credit history, and debt-to-income ratio before approving an equity loan.
4. Choose the Right Loan Option
Decide whether to access equity through:
Refinancing (increasing your current loan).
A home equity loan (a separate loan secured against your home).
A line of credit (flexible access to equity).
5. Submit Your Loan Application
Prepare necessary documents, including:
Proof of income (payslips, tax returns).
Credit history.
Current mortgage details.
Property valuation report.
6. Receive Funds & Purchase Your Second Home
Once approved, the lender will release the equity funds, allowing you to use them as a deposit or towards the purchase price.
You can then finalise the purchase and settle on your second property.
By following these steps, you can smoothly access and leverage your home equity to buy a second home while maintaining financial stability.
Get Expert Advice on Home Equity
Smartfinn Advisors can help you unlock and manage your home equity with confidence. Whether you’re investing, renovating, or consolidating debt, we provide expert guidance tailored to your goals.
Contact us today to assess your equity and explore the best borrowing options. Call, enquire online, or book a consultation with our team.
