How to Buy an Investment Property Using Your Mortgage-Free Home
From Aaron’s YouTube: “How to equity from a mortgage free home to buy an investment property #newzealand #firsthome”
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Posted 10 May 2025
The short version
- You can use 80% of your mortgage-free home's value as usable equity for an investment property.
- A 30% deposit is typically required to buy an investment property, but new builds may only need 10-15%.
- Your total lending increases when you use equity to buy an investment property, so servicing the loan is key.
- Rental income is scaled down to 80% or less to account for expenses, so income is crucial for approval.
How Equity Works in a Mortgage-Free Home
If your home is worth $1 million and mortgage-free, you have $800,000 in usable equity (80% of the value). This differs from having a mortgage, where your equity would be the value minus what you owe. Equity acts as your leverage to secure lending for an investment property without needing a cash deposit.
In Aaron's example, $800,000 of equity is available to use. This equity can be tapped into to fund the deposit for your investment property, provided you meet the bank's income and servicing requirements.
Using Equity to Buy an Investment Property
To buy an investment property worth $1 million, you typically need a 30% deposit ($300,000). This deposit comes from the equity in your mortgage-free home. In this case, $300,000 is taken from the $800,000 equity and used as the deposit for the investment property.
This means you’ll have a new mortgage of $300,000 registered against your once mortgage-free home. The investment property will then have a mortgage of $700,000. In total, your lending increases by $1 million, combining the two mortgages.
Key Considerations: Income and Servicing
One common oversight is whether you have the income to service $1 million worth of lending. Even with rental income from the investment property, banks scale this down to 80% or less to account for expenses like maintenance, vacancies, and property management.
Aaron emphasises that most people already have the equity in New Zealand, but income is the primary hurdle. Before proceeding, ensure you can comfortably service the increased lending, especially when interest rates fluctuate.
This is general information, not personalised financial advice. For advice on your situation, talk to Aaron.
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