How to use the equity in your current property to buy another home
Millions of Australians are sitting on a ‘gold mine’ without realizing it – and by accessing it, they can get even richer.
The majority of Australian property owners are sitting on a gold mine that they can use to drive investment growth, and in many cases they are not even realizing its full potential.
Harnessing the power of your property’s “equity” can help you quickly grow your investments without needing to use a single dollar in savings, thus accelerating your wealth building and wealth creation.
But it’s not without risk, and while it can be a very smart way to go, you need to cover your bases before you jump in.
What is “equity”?
I’ll start with the basics here, as most financial jargon and terminology can be confusing and overwhelming.
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The equity in your property is simply the difference between the value of your property and the amount you owe. For example, if you own your own home worth $850,000 and owe $550,000 on your mortgage, your net worth would be $300,000 ($850,000 minus $550,000).
If you own more than one property, you can calculate your total property equity by adding the value of all the properties minus the combined value of the debt held on the properties.
How does equity release work?
In Australia, most banks are usually happy to lend up to 80% of the total equity in your property without asking too many questions or paying additional fees like Lenders Mortgage Insurance (LMI ).
This means that if you own a property that has gone up in value or you’ve paid off part of your mortgage (or both), you’re probably in a good position to be able to “unlock the equity” in your property and put it to use. to invest.
The caveat here is that you need to be able to repay your mortgage debt, which banks will look closely at before approving you for a capital release mortgage.
How to invest with equity?
The most common investment strategy is to buy a property. Generally, if you have a 20% down payment plus money to cover stamp duty and purchase costs, you are in a good position to buy.
If you have good net worth, you can actually borrow money to fund your 20% security deposit plus fees, which means you can buy another property almost immediately.
The second most common investment strategy is to use the equity in your property to build a stock portfolio. When you borrow to make an investment (including stocks), the interest payments on that debt are generally tax deductible, which means this strategy can help you invest more money faster and create tax deductions at the same time.
Again, the caveat here in both cases is that banks will be looking to make sure you can cover mortgage repayments – but if you’re taking a sensible approach to growing your investments, you should already be making sure you can comfortably afford the cost of any investment.
What are the risks of using equity to invest?
Borrowing to invest can help accelerate and magnify your investment gains, but on the other hand, it can also increase your potential losses.
If you choose a bad investment that goes down in value, you may even end up owing more than your investment is worth. And if ever you are forced to sell your investment at the wrong time, you can find yourself in serious trouble.
This means that when you are borrowing to invest, it is very important that you have a rock solid plan. You need to make sure you can afford your investment not only today with current interest rates and costs, but also do a stress test to make sure you can cover things if your costs go up or the income from your investment is lower than expected (think of rental vacancy, etc.).
Using equity to invest can seriously accelerate your wealth building and the speed with which you move forward, bringing you one step closer to financial security and freedom. But it comes with risks that need to be carefully managed.
If you are seriously considering using equity for investing, take the time to plan your investment and determine how it fits into your current situation and any changes you expect in your situation over time.
This way, you’ll put yourself in a position to take smart, confident action and work towards the results you expect from your investments.
Ben Nash is an expert finance commentator, podcaster, financial advisor and founder of Rotate Wealthand author of Amazon’s best-selling book ‘Get Unstuck: Your guide to creating a life not limited by money’.
Ben is hosting a series of free money education events in 2022 to help you get ahead financially. You can check all the details and reserve your place here.
Disclaimer: The information in this article is general in nature and does not take into account your personal goals, financial situation or needs. Therefore, you should determine whether the information is appropriate for your situation before acting on it and, if necessary, seek the advice of a financial professional.