If you’ve owned a home in New Zealand for some time, you may have already paid down a significant portion of your mortgage. At the same time, your property’s value has likely increased and so too has your equity. Equity is a valuable asset that opens up possibilities for homeowners, including the option to use equity to buy a second home as an investment property or holiday home. Read on to find out how to leverage your equity to grow a property portfolio, along with the key factors to consider when choosing a second home.

Equity explained

In the context of home ownership, equity is the difference between the market value of your property and your outstanding mortgage balance. Essentially, it’s the portion of your home that you truly own. As your property's value increases or as you make mortgage payments, so your equity grows.

Here’s an example to explain how equity works:

John and Sarah bought their first home in New Zealand five years ago for $500,000 and paid a deposit of $100,000, leaving a mortgage of $400,000 and equity of $100,000.

Over the years, they diligently made mortgage repayments while the value of their property continued to increase during the real estate market boom.

Fast forward five years, and the current market value of their home has risen to $700,000 while their outstanding mortgage balance has decreased to $350,000 because of their regular repayments.

Current Equity Calculation:

Market Value of Home: $700,000
Outstanding Mortgage Balance: $350,000
Equity = Market Value of Home - Outstanding Mortgage Balance
Equity = $700,000 - $350,000
Equity = $350,000

In this example, John and Sarah now have $350,000 in equity in their home, however, there is a different calculation to work out their usable home equity as shown below.

Usable home Equity loan calculation:

Market Value of Home: $700,000
Outstanding Mortgage Balance: $350,000
Usable Equity = Market Value of home x 80% = $560,000 - Outstanding Mortgage Balance $350,000
Usable Equity = $210,000

How much equity you can use

The amount of equity you may be able to use towards buying a second home will depend on the lender’s requirements along with your financial situation. Typically, banks will allow you to access up to 80 per cent of the equity in your existing home to help pay for a second home.

Keep in mind that when buying a second home, investors are required to stump up a higher deposit than owner-occupiers, because of loan to value restrictions. While investors need 20 per cent deposit when buying a new build property, they require a 35 per cent deposit when buying an existing property.

As each bank has its own lending criteria and rules around using equity, it’s best to work with a mortgage adviser who can help you navigate these complexities to find the most appropriate financing solution.

Choosing the right second home

Regardless of whether you’re buying a second home for investment purposes or to use as a holiday home, there are some important factors to consider:

• Location: Choose a location with high demand, good rental yields, or potential for capital growth.
• Property type: Choose a property that aligns with your investment goals. Are you looking for rental income, long-term appreciation, or a property to flip?
• Rental potential: If you intend to rent out the property, evaluate the rental market in the area to determine the potential rental income.
• Amenities and infrastructure: How close the property is to essential amenities such as schools, shopping centres, public transport, or recreational facilities will impact its appeal.
• Condition and maintenance: Have the property carefully inspected for any structural issues or maintenance requirements.

Work with a mortgage adviser

Using the equity in your existing home to buy a second property as an investment or holiday home can be a wise financial move. Not only can a second property potentially generate income, but it also offers the benefit of a retreat for the holidays.

Before choosing a second home, it’s important to carefully consider your financial situation and property choices. Consult with a Mortgage Express branded mortgage adviser to get mortgage advice around using equity to buy a second home.