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 of leveraging your home equity for investment purposes before making any decision as this may be something that can greatly benefit you in the long term.
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 as the cost of living goes up as well as interest rates. This is where leveraging your existing equity could be of help without having to save up additional funds for a deposit.
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, 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 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 before sale. You might consider turning your home into an investment and begin your investment journey. It is always best to speak with a tax specialist to see how this may impact you in the future.
Disadvantages of leveraging your home equity for investment
Here’s what to avoid if you’re looking 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. So understand that if rates were to go up by 3% in the future, would you still be able to cope with your debt obligations?
• When borrowing to renovate offers no capital gains: Consider if renovating will increase your existing property’s value or buying a new investment property is a better option for you. Consider the cost of renovating vs potential sale price before and after renovations(Speak with a real estate agent about their thoughts)
• 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.