Whether you're looking to invest in property, shares or even renovating your home, borrowing against the equity in your home provides great opportunities but comes with some big risks.
The equity in your property is a valuable resource and may allow you to borrow further money to achieve your goals sooner.
What is equity and how is it calculated?
Home equity refers to the current market value of your home minus the amount of money still owing on your home loan.
As an example, let’s say your home is valued at $1,000,000 and you still owe $300,000 on it, you’ll have $700,000 of equity. As it’s based on the current valuation, the equity you have available can rise and fall.
What can I use home equity for?
The equity in your home can be used to secure finance for a variety of things like renovations, buying an investment property and even investing in shares.
When you use your home equity, you’re effectively increasing the amount you owe to your lender and using your home as security for your borrowing. With that in mind, it’s a good idea to think about the long-term impact of taking on more debt, whether you can afford higher repayments and your investment time frame.
Investing your money wisely could help you to increase your income and assets for your future but it comes with high risks, as losses are magnified when there is borrowing involved.
What should I consider?
Before you use your home equity to take on further debt, ask yourself:
What do you want to use your home equity for and is it a good investment decision?
How much will your repayments increase by and will you still be able to live comfortably?
Will you need to extend the term of your loan?
Have you accounted for a possible rise in interest rates?
What happens if your property depreciates in value and your loan is worth more than your property?
Do you have a household budget and savings buffer in place to accommodate for additional or unexpected costs?
What would happen if you were unwell and couldn’t work, how can you meet the repayments?
What is your investment time frame as this may impact whether the investment has time to grow and perform?
Accessing equity in your home should only ever be considered as part of a broad, long term financial plan. There are significant risks and although money may be cheap to borrow now, that may not always be the case. Seek advice from a licensed financial adviser and tax accountant to consider if this strategy is suitable for you and your goals.
General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial or tax adviser before making any investment decisions.