On the back of strong property prices, home owners have the perfect opportunity to use their equity to grow wealth safely for the future, says Richard Sheppard.
The surge in housing prices over the past few years presents a chance for property owners to build their wealth.
However, many people don’t understand how they can safely borrow money against the equity in their home to pay for the deposit and costs on another property. For less than $50 a week, you can fund an investment property worth more than $500,000.
As a general rule, you need 20 per cent or more equity in your property to get underway. Your lender requires you to keep at least 10 per cent equity as security, leaving the spare 10 per cent or more to pay a deposit and other associated costs to buy an investment property up to a similar value as your current property.
Let us consider a typical example for property owners on the Northern Beaches. The median house price in the area is now more than $1 million. For someone with a mortgage of about $600,000 or less, it is very affordable to borrow $200,000 against the equity in their property as a separate loan. Keeping $50,000 as a buffer as a cash reserve, that leaves $150,000 to cover the deposit and costs for the investment asset.
The buffer is an important risk-management tool and helps manage any potential fluctuations in cash flow.
A good property investment adviser can help you understand how to best use your equity and borrowing capacity to invest effectively and safely. In turn, this allows you to start building your portfolio of properties in a way that best suits your circumstances.
Given the numbers, why do many property owners resist the chance to transform their finances and future? Usually, it is a simple lack of financial literacy and education about the property market.
Attending a professionally-run property investment course can give you the fundamentals to understand the opportunities that the current market conditions present.
Using your equity is an easy way to kick start your property portfolio. The beauty of investment properties purchased in this way is that the rent and tax benefits will often pay for the property, so any capital growth you get is a bonus. With typical growth on the peninsula of seven per cent a year, that represents about $35,000 in your pocket. And with as little as five per cent property capital growth per annum, you could be at least $1 million better off by the time you retire from just one investment property, or far more if you keep using any additional equity growth to fund more property.
Using equity is a huge opportunity, as you only need about one per cent capital growth to cover the costs to buy, hold and sell, so usually any growth of more than one per cent is profit.
So speak to an experienced property investment specialist and secure your financial future.
This article was originally written for the July 2015 edition of Peninsula Living Magazine