Is it worth unlocking your equity to build even bigger opportunities
Using the equity in your house is a good way to build your property portfolio without dipping into your savings. If you’ve owned your home for a few years, there’s a good chance you’ve built some equity, and this can become a useful resource. However, accessing your equity to invest increases your level of risk. It’s always a good idea to consider how much lending you want to take on and the best way to do that is by having a plan. Research is always a good start, but if you are serious about accessing equity, be sure to speak with a financial advisor.
What is equity?
Equity is the difference between the market value of your home and the outstanding amount you owe the bank. For example, if Jane’s home in Darwin is worth $400,000 and she has $200,000 to repay on her home loan, her equity in the house would be the difference of the two amounts, in this case, $200,000.
How much can you use?
Just keep in mind you can’t use all your available equity. Why you wonder? Well because if the property prices dip, the bank doesn’t want an outstanding loan that is worth more than the asset, in other words – your property.
More often than not, banks will lend you eighty per cent of the value of your home, minus the debt you still owe. Now, you may do the calculations and find you have heaps of equity – but it’s not a given you can borrow against it. The bank will also consider your income, age, how many kids you have and additional debts. So, before you get serious about investing, talk to your bank or broker.
The first step is to get a valuation done on your current property or properties. Your bank should be able to help you with this, keep in mind most lenders will only allow valuations to be done once every twelve months.
Can you boost your equity?
When the value of your home increases, so does the equity. Well-chosen properties should rise in value over a period of time, and by steadily paying off your home loan, the value of your mortgage decreases. Meaning the gap between the two - property’s value and the loan, will result in the increase of your home equity.
Cosmetic renovations can also help increase your equity. A new kitchen, deck or bathroom – even a new coat of paint could lift the value of your property. Just be sure to plan ahead, budget according and avoid overspending.
How does using equity work?
The next step is to mortgage refinance. Equity can then be used as a deposit on a second home. There are a few different options to this step, so make sure you see a financial advisor beforehand.
Things to consider
Using the equity in your home does mean the total amount you owe on your home loan will increase, which can result in higher monthly payments. Just because the bank will lend you money doesn’t mean it’s affordable or that it’s a good idea. Always do the figures, look at the cash flow and the projections of the property. It is essential that you plan ahead before you start or consider refinancing.
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