Using Equity To Your Advantage

Using existing equity to build an investment property portfolio

Buying


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Property, especially in Australia’s capital cities, remains a financially rewarding investment in the long term, with metropolitan houses doubling in value roughly every 10 years. Astute investors do their research, locating well-positioned properties in areas where there has been proven rental demand and lifestyle value.

With record-low interest rates, both owner-occupiers and investors have been competing to get a piece of the property market action.

If you are in the market for an investment property, having an existing mortgage – especially if it is for the home you live in – is highly regarded by lenders. It also provides the opportunity to use your existing equity as a deposit for your investment property. 

What is equity? 

Equity – the difference between the value of your property and the amount you owe on your mortgage – can be a powerful tool for building real estate wealth. To access any existing equity will involve refinancing your mortgage. Why not take the opportunity to look at your mortgage options and compare rates?

The benefits of using equity to build your investment portfolio 

The advantage of using equity in your home to access funds is being able to utilise the lower rate of interest, which is why many homeowners use equity to consolidate other high-interest rate credit card debts or personal loans. Not only does it help reduce the size of the repayments, but also the number of different loans by consolidating them into a single loan which has a considerably lower interest rate. 

When it comes to using equity to purchase an investment property, the major benefit of this is that you may be able to access an 'instant deposit' in the form of the equity you have built up in your principle place of residence. Without having to physically save the deposit for an investment property, your road to purchase may suddenly be much shorter.

Since last year, investors have experienced tougher borrowing conditions from the major lenders making the ability to use available equity from your primary mortgage for the largest deposit possible even more appealing.

Adding negative gearing to the mix

If the amount of interest you pay on your investment loan (including any borrowings you have accessed via equity), together with property maintenance costs, is greater than the income you receive (rent), your property is considered to be negatively geared. 

This difference can be used as a tax deduction. For example, if your property generated $20,000 in rental income, but the interest repayments and other tax-deductible maintenance costs were $30,000, you are able to reduce your taxable income by the difference - $10,000.

If you are looking at refinancing to create an investment property portfolio, always base your loan repayment calculations on conservative figures to ensure you can cope comfortably with an interest rate rise of two to three per cent above the current rate.

Always consult an independent financial advisor when looking to make changes to your financial situation.


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