How to use your home equity for investment

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Saving up for your first or your 20th property is no joke—it takes time, diligence and a whole lot of effort. However, if you’re itching to dip your toes into the property market despite not having enough on your bank account, you could tap your current property’s hidden potential—home equity.

Equity is the difference between your property’s value and the amount of money you still have owing on it. You could use this not-so-secret treasure to fund renovations, get access to cash, or buy a property for investment.

Most lenders may allow you to borrow up to 80% of your property’s total value minus the amount you still currently owe against it. However, if you take out a Lenders Mortgage Insurance (LMI), you may be able to borrow more than 80%, depending on the lender and your financial standing.

Calculating your home equity

To calculate your available equity, subtract what is currently owed on your property from its overall value.

For example, if your property is worth $500,000 and you still owe $200,000 in mortgage repayments, you have $300,000 of untapped equity. Using a rule of thumb of 80% of the property’s value, borrowing up to 80% of $500,000 may give you a pre-approved equity limit of $400,000.

If you subtract your outstanding mortgage repayments of $200,000 from your pre-approved equity limit of $400,000, you have $200,000 in equity available. You could use this amount for a deposit and other costs related to your investment property.

Keep in mind that the calculation involves your home’s current value, which may differ from its purchase price as the value may have increased over time.

When you borrow up to 80% of your property’s value, you may avoid paying for LMI. However, if you plan to borrow more than 80%, be prepared to shell out money for LMI—designed to protect the lender should you default on your equity loan.

Funding your investment

Your home’s equity could be used to fund your investment property without dipping into your savings. It may be a smart way to build your portfolio without soiling your pockets.

Once you figure out how much home equity you could access, the next thing to do is figure out the investment property that is best for you and your financial situation.

Some of the factors to consider when choosing a property for investment are:

  • Location. Popular areas such as suburbs near the inner city may attract more buyers or tenants for your property. Check out our Top Suburb page to have a closer look at suburbs that may be worth the investment.
  • Economy. Research about your preferred area’s economy as it vastly affects property prices. New infrastructure linking the area to nearby cities or making transportation also affect property prices.
  • Employment. People would like to live a bit closer where they work. When an area’s economy is booming, with more business opening up, chances are, more jobs are created. With more jobs and more people to accommodate, properties become more in demand to house these people. You may check the Australian Bureau of Statistics for Employment and Unemployment rates.
  • Population. Population and the property market go hand in hand—more people means more housing is needed to accommodate the population. The latest figures from the Australian Bureau of Statistics said the country’s population is set to double by 2075. However, the three levels of government collectively only fund 1.2% of new housing stocks, leaving 98.8% to be accommodated by the private sector.

Increasing equity

Increasing your equity may help you access a bigger amount you could use to buy an investment property. Here are some ways you could improve your equity:

  • Increase your current property’s value. Focus on improving your existing property’s market value. A few renovations and upgrades may boost its value without blowing your budget.
  • Make more repayments. Paying off more than you have monthly may diffuse your interest accumulated over your mortgage’s life, which could improve your equity.

Risks involved

Accessing your current home’s untapped potential for investment is tempting. However, you should always measure the pros and cons before deciding if it’s the right move for you. Some of the risks you may want to consider are:

  • Larger repayments. Since you are going to increase the money you owe on your mortgage, expect larger repayments. Make sure to discuss your options with your lender. Ask about the amount you may pay for your monthly repayment.

Ask yourself—how could I make the larger repayments should my investment does not pan out immediately? It’s ideal to plan your finances ahead and see where your increased repayments may fit in.

  • Bigger interest. If you are unable to repay your loan quickly, you may face a bigger interest rate. If you spread out your loan over a 25-30-year term, you may end up paying thousands of extra dollars in interest.

Consider paying off the debt as soon as possible. Speak to your lender about your options. You may be able to split the loan into two separate accounts—the interest would this be the same—but you would be more focused on paying off the debts as they have separate statements and repayments.

  • Risky return. When you tap your current home’s property, you could use it for investment without dipping into your savings. However, if your investment doesn’t give the return you would like or you make a loss, it would highly affect your finances—you still have to make repayments on your equity loan without funding from your investment.

Think long and hard if tapping equity is the right strategy for your investment and finances. Seek the advice of a professional to further understand the risks involved.

Don’t just follow the pack, do your research and tailor your decisions based on what would work for YOU. Only invest if you are a hundred percent sure that you can afford the repayments. It may also be wise not to use up your entire available equity at one go. You may keep some reserve for maintenance and repairs or savings for a later time.

Top Suburbs : alexandra hills , berala , bendigo , revesby hts , mt colah

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