Home Equity Can Lead to Financial Freedom
There’s an old saying that it takes money to make money. Whether you believe this or not, many feel that a lack of a deposit is one of the biggest barriers preventing them from purchasing an investment property. In many cases however they often ignore the wealth they have accumulated from their primary asset – their very own home.
So what is equity in a home? Let’s illustrate with an example. Todd wants to buy his first investment property but doesn’t have the money he needs to finance a deposit – or so he thinks. Todd has been looking at an investment property that will sell for around $350,000. He has around $35,000 accumulated in a savings account which would represent 10% of the value of his purchase. In many cases Todd can secure a property with this level of deposit but he prefers a 20% deposit and 5% for purchasing costs in place before he goes ahead. At the moment he seems to be well short.
Todd and his wife own a home that they have lived in for the last 12 years. Initially they had just 20% equity in their home but thanks to regular repayments and an increase in the value of their property they now own almost 50% of it outright. The value of their home is $500,000.
Todd and his wife decide to refinance their home loan to access the equity they have accumulated in their home and cover the shortfall in their deposit on the investment property. Todd is comfortable with refinancing his home mortgage to 80% from the current 50% level which would provide them with access to $150,000 ($500,000 x (80%-50%)) of additional equity. Todd can set up this access to his equity as a drawdown facility, meaning that he can access up to $150,000 but will only use what he needs and will be charged interest accordingly.
As his investment property is $350,000 Todd only needs $70,000 to finance his deposit and $17,000 to finance the purchasing costs so he draws only these amounts from his home redraw facility. This not only leaves Todd with $80,000 he can access later, (if he decides to purchase another investment property for example), but also means he can keep his $35,000 cash for an emergency. If he has an offset account the $35,000 can not only be kept, but can reduce the amount he will pay interest on as the interest will be charged on the net balance owing.
Of course there are other factors that Todd and his wife need to consider, for example if they are planning to sell their house or move to a more expensive one this might affect their decision to borrow and how much they will want to devote to the investment property. The great news however is that they have found access to funding for their investment property that was previously sitting dormant.
Are you sitting on lazy home equity that is not being utilised? In most cases accessing equity through refinancing is easier than you think. Work through our Refinance Calculator to determine how much you can access from your existing equity for your next investment property.