Nine Points To Know About Using Equity to Buy an Investment Property

Few of us will ever make a larger investment and financial commitment than buying our own home. Property is not only a big investment but also a big asset and so it follows that many people choose to use the equity in their home to purchase an investment property or properties.

1:  The term ‘equity’ is not always well understood, but in simple terms equity refers to the difference between the value of your property and what you owe. For example, if your home is worth $500,000 and you owe $260,000, you have $240,000 worth of equity.

2:  It is often possible to use the equity that you have to undertake renovations, purchase shares or managed funds, refinance your mortgage or add to your property investment portfolio.

3:  If you choose to use the equity in your home to invest in another property, the equity provides you with a source of credit on your mortgage. This line of credit is provided up to a specified amount and can usually be taken in stages or in one full amount.

4:  The amount that you are able to borrow completely depends on your personal situation. Essentially, it will be determined by how much you have already borrowed and owe, as well as the income and assets that you have available. When using the equity to help fund the purchase of an investment property, the values of both your new and existing properties will be taken into consideration.

5:  Typically, an investor is able to access up to eighty per cent of their home equity. If an individual had $100,000 in equity, they would be able to access $80,000 of this for the purchase of an investment property.

6:  Using the equity from an existing property can be remarkably beneficial. As many of us realise, saving money for a deposit (or for other purposes, such as renovations) can take significant time and an equity home loan often means that an investment property can be purchased much sooner than it otherwise would.

7:  While the equity you may have available to you is important and an extremely useful way to expand your asset portfolio, it is not a golden ticket for spending exorbitantly and well beyond your means. To the contrary, all debt needs to be managed with care and in such a way that investment returns are maximised while risks are minimised.

8:  While professional financial advice should always be sought, it is generally recommended that an investor concentrates their efforts on repaying the loan on their principal home as quickly as possible. The reason for this is that the equity used from your home to enable the purchase of a property investment is tax effective, whereas the remaining debt on your home is not tax effective. In the long term and on an on-going basis, the costs of your home loan are significantly more than the loan costs of your investment property.

9:  As a person increases their property portfolio, they are able to use not only the equity in their home to help fund further purchases but also the equity that exists in their investment properties. This is a significant reason why so many people are able to enhance their financial position through the accumulation of property.

Equity in property is effectively used by many people to acquire new properties and provide funds. While an accountant or financial advisor is best placed to advise on matters of investment and equity, recognising some of the benefits that come from this type of finance is helpful in realising and accessing the property investment options available to you.

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