Accessing your home equity, or leveraging your debt, is one of the most successful investment strategies you can use to buy multiple properties and reach your financial goals faster.
But it can also put your investment portfolio at risk if you don’t have the right knowledge for your circumstances.
So how can you use untapped equity to power your investment portfolio, and minimise your probability of risk?
What is Home Equity?
It’s a common misconception that you have to have paid off your home loan before you can use your property as equity. The truth is, you can use your home as equity before the balance is settled, but it will take time to build this equity.
Understanding how equity works is key: equity is the difference between the existing market value of your property, and the amount you still owe on your mortgage.
For example, if an investor owns several properties with different mortgages, they have two different equity sources to access.
Using the example above, an investor would have $500,000 in home equity split between two properties, which can be used to fund another investment.
How to Grow Your Equity Quickly
A smart investor already knows that improving the value of a property is key to capital growth. But by further increasing the value of your property, you can also increase your accessible equity.
Aside from regular maintenance, renovations, extensions, and landscaping can see your property skyrocket in value, boosting your home equity significantly.
Making additional repayments on your mortgage will also increase your equity, not to mention reduce the amount of interest paid on your loan.
How to Access Your Equity
In order to access your home equity, you first need to know how much it’s worth with a professional property valuation.
After you’ve completed this step, you can then begin your mortgage application.
Accessible Equity versus Useable Equity
Once you’ve found your potential investment property, you’ll need to figure out how much equity you’ll actually be able to leverage.
There’s a big difference between the equity you own and the equity you can actually use. As home loan lenders only lend to 80% of the current market valuation (known as the Loan to Value Ratio), you can’t borrow the full amount of accessible equity.
For example, if you own two properties and have $500,000 in accessible equity across both, the amount you can borrow is calculated like this:
$1,400,000 x 80% – $900,000 = $220,000.
That $220,000 in useable equity is far less than the original $500,000 in accessible equity. After taking in to account legal fees, mortgage broker fees, building inspections and real estate commission, that figure can be reduced further.
How Equity Loans Work
Home equity loans work differently from traditional home ownership property loans. They act as an accessible line of credit (Home Equity Line of Credit, HELOC, or LOC), and the equity on your home stands as collateral for the loan.
It works like a credit card, where your useable equity is the maximum amount you can access. A line of credit generally has a set term, called your draw period, and then a subsequent repayment period. During the draw period, you’re free to use your equity as credit for as long as you like.
A HELOC is an interest-only product, which means the minimum monthly repayment is the monthly interest charged on the line of credit.
Before accessing the equity on your existing properties, ask yourself:
- Could my properties decline in value, thereby decreasing my existing equity?
- Do I have income insurance or other safety nets to cover monthly repayments should I lose my income, and risk defaulting on the monthly repayments?
- If interest rates increase, will I be prepared and financially able to cover the cost of repayment?
These can be some tough questions to answer, so it may helpful to seek professional consultants to assist you through the mire. OpenCorp’s property investment experts can help answer all your queries. Contact us today to get further along the path to building a solid investment portfolio!