The Power of Equity for Property Investors

As a property investor, one of the most powerful tools at your disposal is equity – the value of ownership built up in your home or other properties. Equity can provide you with the leverage to grow your property portfolio and achieve your investment goals ahead of schedule. Let's explore how understanding and utilising equity can benefit you.

Understanding Equity

Equity refers to the portion of the property that you truly own. It is the difference between the current market value of your property and the amount you owe on your mortgage. You gain equity by making your monthly home loan repayments and if your property increases in value.

For instance, imagine you purchased a home for $500,000 and took out a mortgage of $350,000. Your equity would be $150,000 ($500,000 - $350,000). After a few years of making mortgage payments and benefiting from the property's value appreciation, the current market value of your home is now $600,000 and your mortgage balance is $300,000. In this case, your equity would be $300,000 ($600,000 - $300,000).

Usable Equity

Most lenders want you to have some skin in the game when you borrow money from them. As a result, they typically limit how much equity you can access and borrow against. This is known as your ‘usable equity’ and is generally calculated by working out 80% of your property’s current value minus the amount outstanding on your mortgage.

Using the previous example, your usable equity would be $180,000 (80% of $600,000 minus $300,000).

Accessing Your Equity

So, how can you access this equity and get it working hard for you? There are several ways to tap into this equity, such as:

• Refinancing your existing mortgage to reflect your home’s current market value.
• Taking out a line of credit loan.

Cross-Collateralization

Cross-collateralization is when you use your home equity as security to buy another property or properties. While it can help you access higher borrowing amounts, it also ties the fate of multiple properties together. This can limit your ability to sell or refinance one property without affecting the others.

Factors to Consider

While borrowing against your equity can be a useful funding option, it’s important to consider some of the risks involved. Most importantly, ensure you can comfortably manage loan repayments for both properties, especially if the investment property is negatively geared and doesn't generate sufficient rental income. There are also tax implications to consider (examples).

How to Build Equity in Your Home

Boosting equity in your home involves increasing the value of your property while reducing the amount of mortgage debt you owe. Here are some ways to do this:

• Making home improvements and renovations (focus on improvements that offer a high return on investment).
• Installing energy-efficient features such as solar panels, insulation, and smart thermostats.
• Adding square footage (where feasible).

Looking to Buy a High-Quality Investment Property?

If you're looking to expand your investment portfolio and want to discuss your options, book a 15 minute discovery call with us. Let's work together to make the most of your equity and achieve your investment goals.

By understanding and strategically utilising equity, you can significantly enhance your property investment journey.