Leveraging Home Equity for Investment Property
Investing in rental properties has become an increasingly popular wealth-building strategy among Australians. Recent data shows that 21% of Australians aspire to own investment properties, with this percentage rising to 27% for Gen Z and 23% for Gen Y. The appeal is evident, as rents have surged 39.7% over the past five years, rental vacancy rates are at a low 1.3%, and home values nationally have increased by 13.5% since January 2023.
Using Home Equity
Recent property price increases have created opportunities for homeowners to leverage their equity for investment purposes. CoreLogic’s latest Pain and Gain report reveals that property profits have reached a 14-year high, with homes resold in the first quarter of 2024 generating a median profit of $265,000.
How It Works
- Property Valuation: Determine your home’s current market value.
- Loan Balance: Calculate your remaining loan balance.
- Available Equity: The difference between your home’s value and loan balance.
- Refinancing: Borrow against your available equity.
Example Scenario
- Original purchase: $750,000 house
- Current value: $1 million
- Original loan: $600,000
- Current loan balance: $500,000
- Refinance to: $700,000 loan (70% of current value)
- Unlocked equity: $200,000 for investment property deposit
Banks typically allow borrowing up to 80% of a property’s market value. In this scenario, refinancing to an $800,000 loan could unlock $300,000 in equity.
Benefits of Using Home Equity
- Access to funds without using cash savings
- Potential for rental income
- Opportunity for capital gains
- Possible tax benefits
- Future equity growth in investment property
Alternative Strategies
- Cash Deposit: Using available funds for a direct deposit.
- Converting Current Home: Turning your existing home into a rental after upgrading.
- Diversification: Using home equity to invest in shares or boost superannuation.
Considerations
- Assess your financial situation and goals
- Understand the risks associated with property investment
- Consult with financial professionals for personalised advice
Leveraging home equity can be a powerful strategy for entering the property investment market, but it’s crucial to carefully consider your options and seek professional guidance to ensure it aligns with your financial objectives.
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