The humble family home could be your key to increased wealth
If you own your home, you may hear people talking about leveraging home equity in the property. Leveraging means to use borrowed money to increase the return of an investment.
How leveraging works
Suppose you purchased your home five years ago for $500,000. Of that $500,000, you put down a 20 percent deposit and borrowed $400,000. In five years, your property increases in value by $150,000, which means the original 80 percent mortgage now only represents 61 percent of the property’s value — possibly less if you’ve been paying down the principal and interest.
By refinancing your loan to 80 percent of the $650,000 value of your property, you’ll create a cash pool of $120,000. What you choose to do with that $120,000 is known as ‘leveraging equity’.
Moving house to leverage equity
One way of leveraging the equity in your home is to use it to move house. If your home loan is portable, this will allow you to avoid any fees and charges, while also leveraging the equity in your home. Using the example above, you can look for a home worth $220,000 more than your existing home. Keep in mind that while your property increased in value, so did everyone else’s.
Investing in property
Rather than moving house, you may choose to use the $120,000 equity in your home, plus your original $100,000 investment to put a deposit down on an investment property. Be mindful of the fact that you’ll now have two mortgages to service. Rather than using the full amount of equity in your home, it may be wiser to look for a cheaper investment property, and only use a portion of it.
Buy an existing investment property
Suppose you’re looking at purchasing a $300,000 investment property, which is rented out for a return of 10 percent per annum, or $30,000. Suppose now you didn’t buy the property in cash. Instead you mortgaged the property and borrowed $180,000 and invested $120,000 from your existing home’s equity.
After paying interest on the loan, your return might only be 5 percent each year. However, 5 percent of $300,000 divided by your equity investment of $120,000 is the equivalent of an 80 percent return on investment, rather than just 10 percent.
There are lots of things to consider before leveraging the equity in your home. Be sure to do your research and make your next move carefully.
Want more info about how to leverage your equity?
Disclaimer: Please note that all information contained in this blog is purely general and should be regarded as advice only. We recommend that you always seek professional advice before making property decisions.
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