HOME EQUITY IS THE DIFFERENCE BETWEEN YOUR PROPERTY’S REAL MARKET VALUE AND THE BALANCE OF WHAT YOU OWE TO THE BANK ON YOUR MORTGAGE.
- My house’s market value is: $400,000
- The balance I owe the bank on my mortgage is: $250,000
- Therefore my equity is: $150,000
Equity in property is generally achieved by one of three ways:
- Reduce the debt by paying down the principal
- Allow time and inflation to drive the value of your home up in value while you merely service the interest component of the loan
- A combination of one and two; that is, pay down debt as your home appreciates in value
It is worth noting that when you pay down the principal part of a home loan or an investment loan you may have to go through a fresh (and costly) application process to re-borrow that money back again. There are other, arguably better but certainly more flexible ways to set up your loans so that surplus cash can be parked against a property loan for as long as you like. If you put on your ‘business brain’ and treat property investing accordingly, you will no doubt opt for the option that saves you money and allows you to stay in control.
If you’ve owned a home or investment property for a few years, there’s a good chance you may have already built up some reasonable equity; subject to what stage of the property clock you are in the current cycle. If so, this can potentially be turned into a valuable resource that gives you options to kick start or restart your ability to invest in property and move closer towards the goal of financial freedom.
Perhaps you are just getting started on your journey to financial freedom, or maybe you are someway down the track already. By contacting MRD we can quickly determine your current starting point, including the current market market value of your principal place of residence and any investment properties you have. The difference between the value of your property portfolio and the total amount you owe on them will reveal your equity position. Armed with this information and your income(s), we can quickly come back to you with your approximate borrowing capacity and your purchasing capacity - as determined by the servicing calculators of the many bank and non-bank lenders we access.
To move forward we must first accurately determine your current position, and at MRD we are happy to do this for you on a complimentary and no obligation basis.
Many property investment gurus will say that it is important to repay the loan on your home as soon as you can. Any equity that is drawn down from your home to purchase an investment property is tax effective; whereas any remaining personal debt on your home remains non deductible. Therefore, the non deductible debt against your principal place of residence (your home) will cost you much more on an ongoing basis than the tax deductible debt against your investment property. While this is exactly correct, to oversimplify this and churn out a one-size-fits-all solution is unwise. You are uniquely individual, with uniquely individual circumstances and situations; so when it comes to making decisions around something as important as planning for your financial future you really do want to get all these ‘little one percenters’ correct from the outset.
Speak with our team of professionals before acting on the advice of a friend or a newspaper columnist.
Speak to a property specialist today on: 1300 883 854 or contact us