Equity and Investment Property: How they can work together.

 

 

For many of us, home ownership is a proud achievement. But not everyone is aware that it can also be the first step to building a sustainable, long-term wealth plan.

If you are a property owner and have been making payments on your loan over a period of time, then you may find you have built up something called equity. Most of us are familiar with the term, although we might not fully understand what it means and how we can use it to our benefit.

Equity is basically the worth of your home minus what you owe on your mortgage or home loan. The more you understand about equity, the better placed you will be to use it to your advantage. For example, if you are interested in property investment but don’t have the cash deposit to get you started, accessing your equity could be the solution. Essentially, the equity you have built up is a form of savings, which can be used as security and borrowed against when applying for a home equity loan, also known as a second mortgage. Home equity loans tend to be easy to qualify for because the loans are secured by existing real estate.

Lenders will allow you to use up to 80 per cent of your equity as a deposit on another property. You won’t be able to use the full amount because if house prices dip, your outstanding loan would be worth more than the asset. So if your home is worth $100,000 and you owe $90,000 your equity is $10,000 and your useable equity is $8,000. If your home appreciates in value or you have made improvements to the property, your level of equity will also increase.

Because Australia’s housing market is renowned for its strength and resilience, funding the purchase of another property from the equity that you have accumulated in your home is a positive way of growing wealth. You can usually figure out the value of the investment property you could purchase by multiplying your useable equity by four. So if you had $100,000 of useable equity, you would be eligible to purchase an investment property at around $400,000.

If you’d like more information on accessing the equity in your home, 21st Century Group are here to help. Our expert team can guide you through every step of the process and help you to sustainably achieve your personal wealth goals, whatever they might be.