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Is equity the key to wealth?

Is equity the key to wealth?

Keen to buy a rental property but short of a deposit? Your home equity could open the door.

Now could be the time to invest in a rental property. The latest figures from RP Data/Rismark show that property prices rose late last year in response to lower interest rates – the first upswing since 2010. Vacancy rates remain tight, and rental yields nationally range from around 4.3 percent on houses to 5.0 percent on units. Rismark director Christopher Joye says we expect to see house prices rising again in 2012.

The trouble is, it’s not easy saving a cash deposit for an investment property when you’re already paying off a home loan. The solution may lie in home equity – the difference between your home’s market value and the balance of your mortgage.

How it works

Tapping into home equity involves borrowing more against your home. This can either be done by refinancing with a new lender or extending the existing loan through your current mortgage provider. 

By way of example, if your home is worth $800,000, and you have $400,000 remaining on your mortgage, you have home equity worth $400,000. A lender may let you borrow the full $400,000 though you will be asked to pay lenders mortgage insurance as total borrowings equate to 100 percent of the property’s value. Alternatively you could borrow enough to fund a reasonable deposit on a rental property, using a separate loan secured by the investment property to fund the balance of the purchase. 

Multi-loan accounts 

It’s not as complex as it may sound. Many lenders provide multi-loan accounts that split the tax deductible portion of the loan (related to the investment property) and the non-deductible part (related to your home).

Alternately a single loan may be available for both properties – again using the flexibility of multi-loan accounts to maintain a clear record of the debt that is tax deductible.

Financing an investment property using home equity does mean using both your home and the investment property as security for the loan/s. This highlights the importance of selecting a well-located rental property that will experience minimal vacancy periods, and carefully assessing your ability to comfortably meet the loan repayments. It’s also worth speaking to your financial advisor or accountant to ensure that harnessing home equity is the most effective and tax-friendly strategy for you.

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