Property Equity, Incentives and Cross Securitisation: A Guide for Property Investors

Property investment offers a pathway to wealth creation, but it's important to understand the tools available to leverage your assets and secure financing. In this blog, we'll explore the concept of property equity, highlight various monetary incentives offered by the government and developers and discuss cross-securitisation and its implications for obtaining a second loan.

Understanding Property Equity

Property equity is the difference between the current market value of your home and the outstanding balance on your mortgage. It represents the portion of your property that you truly "own." Your equity grows as your mortgage balance decreases over time or as the property value increases.

For investors, this equity can be a powerful tool. Many use it as a deposit to purchase a second property, allowing them to build a portfolio without needing large sums of cash. By refinancing or using a home equity loan, you can access a portion of this equity to fund your next investment.

This approach is particularly beneficial when property values rise, as it allows you to leverage the increased value of your existing home. However, it’s essential to manage this responsibly, as borrowing against your equity increases your total debt, impacting your cash flow and borrowing capacity.

Government and Developer Incentives

To support the property market and make investing more attractive, there are several incentives provided by both the government and developers:

Government Incentives

1. Stamp Duty Concessions
   Depending on the state and the type of property purchased (e.g., off-the-plan), investors can benefit from reduced stamp duty or even full exemptions.
   • The Victorian Government’s temporary off-the-plan duty concession (available from 21 October 2024 to 21 October 2025) significantly lowers upfront costs for apartments or townhouses within strata subdivisions with common property. This concession allows all purchasers - including investors, companies and trusts - to deduct construction costs incurred after the contract date from the property’s purchase price when calculating the dutiable value.
   • Key Exclusions: The concession applies only to contracts signed during the specified 12-month period and does not extend to house-and-land packages or properties subject to the Foreign Purchaser Additional Duty (FPAD).
2. Depreciation Benefits
   Investment properties offer the opportunity to claim tax deductions for the depreciation of fixtures, fittings and the building itself. These deductions can substantially reduce an investor's taxable income, improving overall returns.
3. Capital Gains Tax (CGT) Discounts
   For properties held for more than 12 months, investors may qualify for a 50% reduction in capital gains tax (CGT) upon sale. This provides a significant incentive for long-term investment strategies.

These incentives can be a great boost for investors looking to stretch their budgets further, reduce upfront costs, or maximise returns on their investment properties.

Cross-Securitisation: What Investors Need to Know

Cross-securitisation occurs when a bank or lender uses more than one property as security for a loan. This is a common strategy for investors who want to use the equity in their first property to secure financing for a second property, without having to sell or save for a new deposit.

Here's how it works:

• Let’s say you have a primary residence with significant equity. If you want to purchase an investment property, rather than taking out a completely separate loan, you can use the equity in your first property as additional security for the new loan.
• Both properties are now cross-collateralised, meaning they’re tied together under one loan agreement. If you default on one loan, both properties are at risk.

While cross-securitisation allows for greater borrowing capacity, it also comes with risks. Since both properties are used as security, selling or refinancing one can become complicated. You might be required to restructure your loans or pay fees, depending on the lender's terms. It also reduces flexibility, as all decisions related to either property will involve the bank, from releasing equity to selling the property.

Key Implications of Cross-Securitisation:

• Increased Leverage: Cross-securitisation allows investors to leverage their equity more efficiently, often enabling the purchase of a second property without needing a large cash deposit.
• Higher Risk: If the value of one property falls or you default on repayments, both properties could be impacted, placing you in a more vulnerable financial position.
• Reduced Flexibility: If you want to sell or refinance one property, you may need to reassess the entire loan structure, as the lender could require both properties to remain tied to the loan.

Final Thoughts: Balancing Risk and Reward

Property equity is a valuable asset that can help you grow your portfolio, but understanding the nuances of leveraging it - whether through cross-securitisation or government and developer incentives - is key to successful investing. By carefully evaluating your financial position and working with a financial adviser or mortgage broker, you can make informed decisions to maximise your property investments while mitigating potential risks.

With the right strategy, you can use your equity, take advantage of incentives and expand your portfolio to build long-term wealth.

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