Using the equity in your property to invest is a powerful financial strategy that allows you to leverage the value of your home to control a larger asset base and grow your wealth. It can be an excellent way to access funds for investing without needing to sell your property or build up sizable cash savings to cover initial deposits and acquisition costs. Here’s a guide on how this process works and the key considerations to keep in mind.
What is Property Equity?
Equity is the difference between your property’s current market value and the amount you still owe on your mortgage. For example, if your home is worth $700,000 and your outstanding mortgage balance is $500,000, you have $200,000 in equity. As you pay down your mortgage and the value of your property increases over time, your equity grows. This accumulated equity can then be used as a tool for investment purposes.
How to Access Your Equity
There are several ways to access the equity in your property:
- Working with your current lender to access a set amount of accrued equity in your home. This can be done as a “top-up” or a “cash-out,” with the purpose being future investment.
- Refinancing your mortgage to a more suitable lender who can expand your borrowing capacity and allow you to access equity for a future investment purchase (also known as a “refinance and cash-out”).
- Accessing equity from your investment property or properties, which indicates that your portfolio is growing. This also allows you to release funds for future investments without relying on the equity in your family home.
Benefits of Using Equity for Investment
- Access to Large Amounts of Capital: Using your equity allows you to access a significant sum of money.
- Leveraging the Power of Compounding: By using equity to invest, you’re effectively putting your money to work. If your investments grow in value, you can benefit from compound returns, which can significantly increase your wealth over time.
- Tax Deductions: In some cases, the interest on your investment loan may be tax-deductible, particularly when used for income-generating assets like rental properties. Always seek professional tax advice to understand your specific circumstances.
Risks to Consider
While using equity can be a smart investment strategy, it comes with risks:
- Increased Debt: Using your home’s equity means taking on more debt. If your investments do not perform as expected, you are still liable for repaying the loan, which could strain your finances.
- Market Volatility: Investments in property are subject to market fluctuations. If the value of your investment decreases, you could end up owing more than your investment is worth.
- Interest Rate Fluctuations: If you have a variable-rate mortgage, changes in interest rates could increase your repayment amounts, affecting your cash flow.
- Impact on Loan-to-Value Ratio (LVR): The LVR measures how much you owe on your mortgage compared to the value of your home. Borrowing too much could push your LVR beyond acceptable limits, making it harder to borrow more or refinance in the future.
Is Using Equity the Right Move for You?
Before tapping into your home equity, consider your overall financial situation and long-term goals. Ask yourself:
- What am I trying to achieve? Am I aiming to purchase a one-off investment or build a long-term portfolio?
- What is the bank willing to lend me based on my current financial position?
- What does my budget and cash flow allow me to invest in?
- Do I have sufficient buffers in place to hold the investment long-term?
- What is my risk tolerance for the investment I’m considering?
Getting Professional Help
Consulting with specialists is crucial to determine whether using your equity for investment is a suitable strategy. They can help you assess your options, weigh the risks, and structure your investments to align with your financial objectives.
Working with property investment experts like Future Assist can help you achieve your financial goals sooner. With all the expertise you need under one roof, our team of real estate experts, wealth strategists, accountants, and finance specialists provide comprehensive support to navigate the complexities of real estate investment.
Ready to unlock your property’s potential? Let us help you turn your equity into a smart and profitable investment strategy.
* The information contained in this webpage is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided.
