Using your property equity

Understanding Home Equity

Home equity is the difference between your home's market value and the remaining mortgage balance. It grows as property values increase or as you pay down your mortgage.

When we’re talking about equity you can actually use, we talk about ‘bank equity’, which in most cases is 80% of the property value, less your outstanding mortgage. This relies on the fact the bank will generally look to leverage your property to 80% before Lenders Mortgage Insurance kicks in. 

So if you have a house worth $1 million with a loan of $300,000 you have bank equity of $500,000. Of course it also comes down to your affordability of the increased debt.

The most common reasons for people ‘cashing out’ are to purchase shares or other investments, buy investment property or undertake home improvements. 

Given there’s interest applicable, you’re ideally looking for financial return through income such as rent and dividends, or a capital gain in stocks or property, including any increase in the value of your own home.

Investing in Shares

Home equity can be used to invest in shares to increase or diversify your portfolio allowing you to participate in the stock market’s potential for growth and dividends.

It’s recommended you seek professional advice on this strategy given tax and investment implications.

Acquiring Investment Properties

You can also use home equity to purchase additional properties. Whether residential rentals or commercial real estate, this can generate rental income and benefit from property appreciation.

Property Improvements

Home renovations using cash out are really common, particularly where owners benefit from both the properties' improved amenity and increased market value.

Considerations

Before leveraging home equity for investments:

• Financial Stability: Ensure you have a stable income to manage additional debt, and have a thorough understanding of the numbers around your prospective investment.

• Risk Management: Diversify your investments to spread risk.

Conclusion

Using home equity to invest in shares and properties is a practical way to build wealth. It can diversify your investments, generate income, and capitalise on market opportunities. Remember to approach this strategy cautiously, considering your financial goals and seeking advice if needed.