USING THE EQUITY IN YOUR HOME FOR INVESTMENT PURPOSESGetting ahead financially is becoming further and further out of reach for many Australians. However many are now tapping into their “pot of gold” – the equity in their home - allowing them to invest for the future and forge ahead financially.

Diagram 1 illustrates the financial components of your home:

•Existingborrowings–representedbythebluesection of your home.

Thisistheamountofyourloannotyetrepaid.Thisloanamount(unlessusedtopurchaseaninvestmentproperty)isnotusuallytaxdeductible.

Inthisexample,ifyourhomewasworth$500,000andyouhad$150,000remainingonyourloan,yourexistingborrowingswouldrepresent30%ofyourhomevalue.

•20%equity–representedbytheredsection of your home.

Thisisthesafetynetthatlendinginstitutionsliketohaveastheirsafeguardagainsttheborrowingsonyourhome.

Usuallythissafetynetrepresents20%ofthehomevaluerequiredinequitythatisunabletobetouchedunlessyouwanttopayLMI(LendersMortgageInsurance).

Inthisexample20%equityof$500,000is$100,000

•Remainingequity(whatyou’vealreadyrepaidonyourloan or gainedthroughcapitalgrowthontheproperty)–representedbythe green section of your home

Inthisexampleitshowsthattheremaining50%ofthevalueofthehomeisavailabletouseassecurityfor

otherpurchases.Toaccessthisremainingequity(inthisexample)topurchaseaninvestmentproperty,therearetwooptions:(A)establishalineofcredit;or(B)applyforastandardtermloanwitharedrawfacilityoranoffsetaccountwheretheremainingequityamountcanbeinvesteduntilrequired.

Typicallytheexistingloan(blue)andthenewportionoftheloan(green)wouldberefinanced;howeveritiscommontosplittheseandcreateseparatesub-accountsinordertokeepthenontaxdeductible(blue)amountclearlydifferentiatedfromthedeductible(green)investmentamount.Youraccountantshouldbeabletohelpwiththis.

Inthisexample,$250,000is50%ofthevalueofyourhomeavailabletopurchaseaninvestmentproperty.

Theexamplecontinueswiththepurchaseofaninvestmentpropertyforthesumof$500,000.

Whenyoudofindtheinvestmentpropertyyouwanttopurchase,youcanfundtheacquisitionwith:

(A)Anewloanfortheinvestment property(typically80%ofthepurchasepricetoavoidLMI).

This$400,000loanisrepresentedbythepinksectionoftheinvestmentpropertyinDiagram3.Plus,

(B)Partofthegreenremainingequityinyourhome.Theremaining20%ofthepurchaseprice(usuallyrepresentingthedeposit)plusstampduty,conveyancingcostsandotherassociatedexpensescanbetakenfromthisequity.Intheexampleitwouldrequireyoutodraw$120,000(assuming$100,000[20%deposit]and$20,000[5%totalacquisitioncosts*])oftheavailable$250,000(representedbytheyellowsectionindiagram2)leaving$130,000oftheremainingequity.Thiscouldalsobeusedtopurchaseanadditionalinvestmentpropertyifserviceabilityallowedoryoucouldusethisequitytofundanyshortfallinyournewinvestmentloanrepayments.

Thetaxman(throughtaxrebates)andyourtenants(throughrent)helppayforthenewloans;howeversometimesthereisashortfallthatneedstobeserviced.Thisshouldbetakenintoaccountwhenborrowingtoensurethattheloanontheinvestmentpropertycanbeservicedwithinyourbudgetandshouldincludesomemarginforanyunexpectedinterestraterises.

Thenallyouneedtodoissitbackandletthepropertytakeitscoursewithcapitalgainsgeneratingsomeadditionalequityoverthenextseventotenyears,asithasprovedtodoso(evenintoughtimes)overthelastcentury.

Once you learn this strategy you can repeat it as often as youwant,providedyoucanre-paytheborrowings.Disclaimer:*Acquisitioncostsvaryineachstate.Fordemonstrationpurposesonly,we’veassumed5%.

“All you need to do is sit back and let the property take its course with capital gains generating some additional equity over the next seven to ten years, as it has proved to do so (even in tough times) over the last century”

Tolearnmoreaboutinvestinginpropertyandusingtheequityinyourhome please contact the officeforanoobligationconsultationtodiscussyour personal situation andfuturegoals.