Equity in property investment
If you have taken out a home loan and have been paying it off for some time, you may have access to some equity in your home.
So, what is equity?
Explained simply, equity is the difference between the value of your property (usually market value) and the amount that is owed on it.
For example a home worth $1,000,000 (current average house price in Auckland) with a mortgage of $400,000 has $600,000 in equity, however you can only borrow up to 80% of the home value being $800,000 which means once the current mortgage is deducted there is up to $400,000 in equity available.
As a home loan is paid off, gradually the part of the property that is owned increases. This is called collateral and can be used to finance other assets like the purchase of a new car or to pay for renovations. Whichever way equity is used, remember that interest rates can be a set-back. The interest rate on a car loan may be cheaper in the short term but what could have been paid in five years (usually the max. term of a car loan) will be paid in the duration of the home loan (up to 30 years), meaning more would be paid on interest rates, in the long term.
Use equity to drive your wealth
Another way to use your equity is for a down payment on an investment property. If you already own a property and want to purchase an investment property but don’t have a deposit, the lender will use the equity that you have built in your current home loan as a deposit for the new loan.
Similarly, If you’re looking to build a property portfolio, this, too can be done through the use of equity. Once you have built up equity in your first property you can then look to use that equity to refinance and purchase another property and so on. You are leveraging from what wealth you already have to build up more. Investors are usually able to use up to 80% of their home equity.
It may be beneficial to consult with a mortgage advisor who knows about negative gearing and wealth growth to help you structure your portfolio. Considering different lenders will give you access to more options which could offer you a better service or interest rate than the one your current lender has.
Keep in mind that the way your home loan is structured can have an impact on the use of your equity. For example, if you have set up your loan on a fixed-term interest rate and want to refinance, you could be penalised for costs such as early-exit fees, which can leave you thousands of dollars out of pocket.
As everyone’s financial situation is different, it can pay to speak to an adviser who can help you structure your loan to suit your financial plans and tap into your equity in the future.