Using your home equity as leverage

Part 2 of the ‘Take Control: How Home Equity puts you in the driver’s seat’ article from the December issues of the Australian Property Investor magazine written by Monique Wakelin.

Many Australians and North Americans have something of a mental block when it comes to using the home equity in their own home as leverage to buy real estate investment property. They feel a little jittery about perceived risks to their primary source of security and shelter.

But most people who buy an investment real estate property already have a home an duse the leverage factor because it’s a ready-made “deposit”. This enables the home owner to “re-borrow” part of the equity of the home. These borrowings become a small part of a loan that’s paid back at the applicable rate, along with any other funds borrowed for the investment real estate property.

The basic principle is that home equity is the happy by-product of the initial deposit the owner put in, any principal that has been paid off and any capital gains the home has achieved.

The main benefits of using home equity to buy investment property are:

The Ability To Borrow
Up to 100% of the purchase price of the investment property plus costs. The investment property will remain the primary source of collateral for the lender, as they will generally finance 90 to 95 per cent of the value against that investment real estate property. The notion of “putting the home on the line” doesn’t apply under these circumstances.

There’s No Need To Own
Your home outright or sell it to access enough home equity for an investment real estate purchase. Wise use of this equity can put you into the wealth-creating assets much more quickly than if you wait until you own it outright.

While this strategy increases your mortgage on the home, a wisely chosen investment property will provide enough compounding growth to outstrip the cost of servicing the debt. The golden rule is for the real estate investor to focus on the quality of the asset they’ll own and not merely on what they owe the bank!

Smart investors in real estate and property categorise property borrowings in two ways: as productive debt and non-productive debt. Productive debt is used to purchase real estate assets that will grow in capital value and help contribute to financial independence. Non-productive debt is for consumable items that don’t increase in value or provide income – including cars, holidays and clothes. Non-productive debt attracts higher rates of interest as it’s usually sourced through credit cards or unsecured personal loans.

The residential property investor in real estate is using productive, tax-effective debt to make money through capital growth.

Details about home equity loans and more are found at this condominium resource website for condo owners.