Property Investment: How to use residential equity to build wealth
Residential equity is a powerful tool for wealth creation. If you are a keen investor, pulling out your residential equity and refinancing your mortgage can grow your property portfolio significantly. We’ve looked at ways you can best use your residential equity to safely build wealth and expand your investments.
How do I calculate my residential equity?
Organise to have your property valued and then subtract any debt remaining on your mortgage from the current value of the property. Residential equity is not based on the original price of the property but instead on what you have left to pay off! This is an incentive to be making greater mortgage payments as it increases your equity!
Be aware that sometimes the valuer can be wrong and the real market value of your property may not match what your valuer had initially advised.
Capital growth also plays a significant part in how your equity grows. Diligently paying off your mortgage promises a gradual increase in your equity but fluctuation in capital growth can significantly knock around the equity in your property. If capital growth is increasing even as slightly as 10% pa your $500,000 property will increase in equity by $50,000.
Can I control the capital growth affecting my residential equity?
You can’t control outside capital growth affecting your residential equity but you can influence its effect on your property. Look at ways that you can add value to your property that are inexpensive to you.
Think about renovating! While you shouldn’t underestimate the value of a coat of paint, you may be able to borrow out of your residential equity to accomplish bigger renovations.
Major renovations like a new bathroom or kitchen add the most value to your property but they need to be done well to ensure they maintain equity for a long time. For more affordable renovations, a repaint in a neutral colour can add a significant amount of value to the home.
If the house has hardwood floors, sanding and polishing them can add instant value, getting the gardens re-landscaped or even maintained makes a huge difference if you are looking to sell. For more major renovations, look at how you can create open living spaces and provide more storage.
Adding this kind of value will not only minimise the effect of negative capital growth but it will boost your residential equity when capital growth is in your favour!
How can I take the residential equity out of my property to expand my investment portfolio?
Negotiating how much of the equity you can take out of your property with the bank can be challenging. Keep in mind that just because the bank may offer to give you up to 90% doesn’t mean you should. If you are taking equity out of your property to stand against a new loan the bank will calculate a loan to value ratio. Work out exactly how much equity you will have left in your home after this is done and think about how a negative capital growth and your mortgage repayments will affect it. While freeing up some of your equity to expand your property portfolio can be good, you still want to keep enough in your current property to maintain security.
Line of credit:
Basically this is a massive credit card secured on your property (so make sure you plan this wisely).
You’ll be approved a certain credit amount based on your usable equity, but only pay interest on the portion you spend. Your line of credit can also be linked to an offset account to reduce the amount of interest that your loan accrues, without increasing your repayments.
Think about having your salary paid into your offset account. This will help you to pay off your mortgage faster or save money on interest. It also means you will have the money there should an investment opportunity arise.
In this case you will be paying interest on it all instantly at the current mortgage rates. A lump sum is useful if you have accounted for this and know that your new investment is worth it.
Is a risky way of expanding your property portfolio. Basically, you are using the equity from your existing property as collateral security for itself and another property.
If the debt you have on your existing property prevents you from refinancing, cross-collateralisation is an option you can consider taking. Be wary, however, that you are putting all your eggs in the one basket and if you fail to maintain repayments you are risking losing it all.
Article referenced from http://www.yourinvestmentpropertymag.com.au
Written by Jordan Cox
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