Many Australians are enjoying increased property equity as the value of their homes continues to surge.
It’s great news for those already in the property market and not so great for those trying to break in.
Savvy investors will know that additional property equity opens up new wealth growth opportunities.
How you respond to those opportunities can have an enormous impact on how quickly your wealth accumulates.
Property investment
Using your property equity to expand your real estate portfolio is one of the most tried and true wealth building strategies.
It offers the ability to build your nest egg use rental income for cash flow or to pay off the loan, as well as numerous tax advantages.
But a great deal of care needs to be taken when considering purchasing any investment property.
Some of those factors include:
- Location
- Rental yield
- Capital growth potential
- Prevailing market conditions
Let’s take a closer look at how you can use equity to buy an investment property.
What is equity?
Equity is the difference between the market value of your property and the amount you still owe on it.
Your equity can grow for a number of reasons.
Let’s say you bought a $1,000,000 property in 2020 with a downpayment of $200,000.
That leaves your outstanding loan at $800,000.
The property boom of 2021-22 pushes the value of your property to $1,500,000.
In that time, you have paid off another $50,000 reducing your outstanding loan to $750,000.
But the equity you have in the property is now the same as your remaining debt – $750,000.
That gives you a lot of buying power.
Accessible equity
Accessible or usable equity is what lenders will normally lend you.
It equates to 80 per cent of the value of your home, less what you owe.
Hence in the above example, that would be $450,000.
Lenders use that formula to protect borrowers in the event the value of their property falls and they end up owing more than it is worth.
Note, it is possible to borrow more than 80 per cent if you take out Lenders Mortgage Insurance (LMI).
The ‘rule of four’
A rough guide for calculating what you can buy with $450,000 is to use the ‘rule of four’.
Multiplying your usable equity by four gives you $1,800,000 which is the maximum value of a property you can now buy as an investment.
Lenders will generally lend 80 per cent of the purchase price which would be $1,440,000.
It leaves your deposit as $360,000 with most of the remaining $90,000 to be absorbed in stamp duty, legal fees and other property buying costs.
Hence the total amount needed to buy a $1.8m property is one quarter or $450,000.
But property investment is not the only way you can use your property equity.
Home renovations or improvements
Investing your equity in renovations and home improvements can increase the value of your property, potentially generating more equity and a higher return when you sell.
Renovations that modernise, increase the functionality, aesthetics or energy efficiency of a home can produce higher resale prices or rental incomes.
Be mindful not to overcapitalise to ensure every dollar spent is recoverable with a view to capitalising on the project.
Focus on cost effective upgrades that provide a good return on investment.
Personal investments
Rather than investing in more property, you could use your equity to invest elsewhere.
This could mean starting a business or funding further education such as an MBA.
Or it may simply mean investing in stocks, shares, bonds or managed funds.
Always consider your overall wealth accumulation goals taking into account your time horizons and risk tolerance level when making any investment decisions.
Remember too to diversify your investment portfolio to minimise risk and maximise long-term returns.
Always seek professional advice before using significant amounts of equity for these purposes.
Debt consolidation or repayment
Eliminating and consolidating debt can be another worthwhile use of property equity.
If you have high-interest debts such as credit cards, personal loans or car loans, consolidating them into one lower-interest mortgage makes good sense.
It allows you to streamline your finances, reducing your monthly repayments and potentially freeing up cash flow for other savings or investment opportunities.
Equity release through refinancing
With the additional property equity you have accrued, refinancing your mortgage to one with a higher principle amount might also be a sensible decision.
It will allow you to access your newfound equity and use those funds for investment purposes be that buying additional property, investing in stocks or other assets or starting a new business.
Make sure you do your homework regarding the benefits and costs of the refinance.
Working with a mortgage broker is the best way to compare different loan options and ensure you are making a cost-effective decision.
Get advice now
Having additional equity in your property gives you significant opportunities for wealth creation.
But it is incredibly important you do not waste those opportunities.
Accessing equity for investment purposes can have significant tax consequences including capital gains tax implications and deductible interest expenses.
You should also consider the benefits of negative gearing.
Your decision to utilise property equity also needs to be considered holistically as part of your overall wealth creation strategy and retirement objectives.
That’s why you need to enlist the help of seasoned professionals like Calder Finance Broking and Calder Wealth Management.
Calder Finance are specialists in the mortgage broking business.
If you are considering accessing equity, refinancing or investing in property, we will find you the very best loan and rate for your venture.
Calder Wealth Management are financial experts who can advise you on the wisdom of accessing property equity and how best to utilise it.
They will ensure your investment strategies are sustainable and help not just create but preserve the size and strength of your portfolio for your retirement.
They pride themselves on leading their clients into the future with structure, financial stability and confidence.
Contact them today to discuss all of your financial needs and mortgage requirements.
The information contained on this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.
Written by David Titley from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.
