Did you know that you can use the equity in your home to build wealth?

The equity in your home can be a powerful ally when it comes to building a real estate portfolio. Over the long term this can help you build personal wealth.

This is a strategy that has been used by many Australians, and, as long as you’re sensible about what you’re doing and you have a mortgage broker who understands your financial strategy, it can be very rewarding.

But, what is equity?

Quite simply, equity is the difference between what your home is worth and what you owe on the mortgage.

Banks will generally lend up to 80% of a property’s value without any mortgage insurance, so, for example, if your home is valued at $800,000 and your mortgage is $500,000, then you could potentially access $140,000.

Provided you can service the loan, this $140,000 can be used to cover the deposit and other costs (like Stamp duty where applicable) when buying an investment property worth around $560,000. You can then rent out this second property and use the rental income to help you pay the mortgage.

What to consider

1. Cash flow
A second mortgage can have a significant impact on your monthly cash flow, especially if for any reason, your rental property is vacant, so make sure you’re in a position to service both mortgages by having a stable income. It’s recommended that you have a buffer of three to six months worth of repayments and living expenses, just to be on the safe side. Talk to your accountant too, because under the current tax regime in Australia, there are some tax advantages to owning a rental property.

2. Rental income
If you’re buying a second home for investment purposes, don’t let emotion get in the way – choose a property that’s well located. This means: easily rentable, and in an area that show a solid history of property value growth. This way, it will continue to support itself financially.

3. Staying with your current lender versus refinancing
Making any changes to your financial position, such as buying a second property and therefore, getting another loan is the perfect opportunity to give your mortgage a health check. If your current financial set up is performing well for you, there is probably no reason to spend money refinancing with a new lender. However, if you’re not happy, then take the chance to shop around.

4. Be realistic and be flexible
Life is always changing and so it’s also important to consider exit strategies in case something unforeseen happens, and regularly re-assess your position every few years to make sure what you’ve put into place is still working effectively to help you reach your life goals.

This is not the right financial strategy for everyone, but if you have equity in your home, tapping into it to buy another property can be a great way to use the property market to build wealth for the long term.

For more information, call us.