If you’ve owned your home for a few years, there’s a good chance you’ve built up some reasonable equity in your existing property, helping you to re-invest. It’s good to understand the pros and cons before making any decision.
What is home equity?
Your home equity is the difference between your property’s current market value and the balance of your mortgage. With inflation sitting at just above 6% and likely to go higher, saving for an investment property deposit is likely to get tougher for many Aussie families. This is where leveraging your existing equity could be of help.
Leveraging home equity to your advantage
Many homeowners believe they must pay off their existing home loan in full before thinking of their next property purchase. In fact, the equity built in your home over the years could be used as leverage to invest in property and grow your wealth in the following ways:
- As a deposit: You could use the equity in your property as a deposit against an investment loan. If you have enough equity, you can borrow 80% of the property value without having to save for a deposit.
- Take out a line of credit: You could structure your home equity loan using a line of credit. Based on your equity, you may be approved with a certain amount of credit. You will only have to pay interest on the portion you’ve spent. You could also combine this with an offset account to reduce the interest on your loan.
- Renovations: If you don’t have enough equity to buy an investment property, you can instead use it to renovate your existing property to increase its value. You might consider turning your home into an investment and begin your investment journey.
Disadvantages of leveraging your home equity for investment
Here’s what to avoid if you’re looking to maximise the power of your equity safely:
- Borrowing more than you can afford: Doing this might increase the financial burden on you and your family, especially If you don’t have excess funds saved.
- When borrowing to renovate offers no capital gains: Consider if renovating will increase your existing property’s value or if buying a new investment property is a better option for you.
- Going DIY instead of seeking professional advice: It can be a huge financial commitment, so get all the help you can to make a considered choice to ensure you have taken all suitable factors into consideration.
If you’d like to discuss your options in using equity to buy an investment property or to see if this is the right option for you, please reach out and I’d be happy to have a chat.
Any advice is general in nature only and has been prepared without considering your needs, objectives or financial situation. Before acting on it you should consider its appropriateness for you, having regard to those factors.