For many Australians, using equity to buy another home is a smart way to step into property investment or upgrade their lifestyle. But while it sounds straightforward, it can come with traps if not managed carefully. Understanding the most common mistakes will help you avoid financial stress and protect your investment
In This Blog You’ll Learn:
- What home equity is and how it works
- Common mistakes to avoid when using equity to buy another home
- How to protect yourself with proper planning and advice
What is Equity?
Equity is the difference between your home’s market value and the amount you still owe on your mortgage. For example, if your property is worth $700,000 and your mortgage is $400,000, you have $300,000 in equity. Lenders may let you borrow against this equity to buy another home.
It’s an appealing strategy, but using equity to buy another home requires caution. Let’s look at the mistakes many buyers make.
Common Mistakes to Avoid
1. Overestimating Your Equity
One of the biggest mistakes is assuming all your equity is available to borrow. Lenders generally only allow you to use up to 80% of your property’s value (sometimes more with lender’s mortgage insurance). This means your “usable equity” is less than you might expect.
Failing to calculate this correctly can result in loan rejections or overcommitting financially.
2. Not Considering Loan Serviceability
Even if you have plenty of equity, lenders will still assess whether you can manage repayments on both properties. Some buyers focus only on their equity balance and overlook:
- Current debts and liabilities
- Household expenses
- Potential interest rate rises
- Periods of vacancy if buying an investment property
Overlooking serviceability can leave you struggling to make ends meet.
3. Using All Your Equity at Once
When using equity to buy another home, some buyers tap into every available dollar. While tempting, this leaves no financial buffer for emergencies, renovations, or market downturns. A safer strategy is to use only part of your equity, keeping some aside as a safety net.
4. Choosing the Wrong Loan Structure
There are different ways to use equity—such as a separate loan, a line of credit, or cross-collateralisation (linking both properties under one mortgage). Each has pros and cons.
- Cross-collateralisation – convenient but risky, as selling one property can affect the other.
- Line of Credit – flexible but may tempt overspending.
- Standalone Loan – usually safer, but may require stricter approval.
Choosing the wrong structure can tie up your assets unnecessarily. A mortgage broker or financial adviser can help you decide the best fit.
5. Ignoring the Risks of Market Fluctuations
Property values don’t always rise. Some buyers assume equity will continue growing and borrow aggressively. If the market dips, you may owe more than your property is worth, making it harder to refinance or sell.
Always consider worst-case scenarios and avoid stretching yourself too thin.
6. Forgetting About Additional Costs
Using equity doesn’t just cover the purchase price. Buyers often forget about extra expenses such as:
- Stamp duty and legal fees
- Building and pest inspections
- Council rates and strata levies
- Insurance and ongoing maintenance
Forgetting these costs can cause cash flow problems, especially if your new home needs immediate repairs.
7. Skipping Professional Legal Advice
Another common mistake is rushing into contracts without proper checks. When using equity to buy another home, you’re dealing with significant sums and legal obligations. Without expert review, you may miss hidden clauses, title restrictions, or settlement risks.
That’s why working with professional conveyancers is essential. Property buying conveyancing services ensure contracts are watertight and protect your interests throughout the transaction. Skipping this step can expose you to costly and stressful disputes.
Final Thoughts
Using equity to buy another home can be a powerful wealth-building strategy, but only if managed wisely. By avoiding these common mistakes and seeking the right financial and legal advice, you’ll safeguard your investment. For expert help with property contracts and settlements, trust Jim’s Property Conveyancing. Call 131 546 today.