How to Use Home Equity for Your Next Property Purchase
From Aaron’s YouTube: “Use Equity To Buy Another Property (3 Examples)”
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Posted 27 April 2023
The short version
- Use 80% of your current home's value minus your mortgage to calculate usable equity.
- Existing investment properties require 40% deposits versus 20% for new builds.
- Turning a current home into an investment changes equity rules (40% retained vs 20%).
- Servicing both old and new loans determines if equity strategies are feasible.
The equity maths (step by step)
Start by writing down your current home's value (check Homes.co.nz or OneRoof if unsure). Aaron uses a $1M example with a $600k mortgage - leaving $400k in equity. But banks require you to keep 20% equity in your main home, so you can only access up to 80% of the value ($800k in his example).
Subtract your current mortgage from that 80% figure to find usable equity. For Aaron's example: $800k (80% of value) - $600k (mortgage) = $200k usable. This becomes your deposit for the next property. Rewatch his steps if the numbers don't click yet.
Investment property rules differ
That $200k could buy a $500k existing rental (40% deposit required) or a $1M new build (20% deposit). Aaron stresses this is just the deposit maths - servicing is the real hurdle. In his scenario, total borrowing jumps to $1.1M ($600k + $200k + $300k to cover the $500k purchase).
Rental income helps, but banks will assess whether your total income can cover all loans if the property sits empty. Always run servicing calculations before getting excited about equity amounts.
Switching homes vs investing
If you're buying a new home and turning your current one into a rental, the rules change again. The 'retained equity' requirement jumps to 40% for investment properties. In Aaron's $1M example with a $600k mortgage, you couldn't access any equity - you're already at 60% LVR.
This catches many people out. Whether you're moving or investing, always calculate both deposit and servicing requirements. Equity strategies look great on paper until the bank checks if you can actually afford the repayments.
This is general information, not personalised financial advice. For advice on your situation, talk to Aaron.
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