Using equity to invest in property

Using equity to invest in property
Once you have purchased a home and are making monthly loan repayments, you are in the process of building equity. Combined with capital growth increases, over a number of years your equity can grow substantially. The opportunity to use the equity you have built up in your home is one of the benefits of home ownership.
This equity can be used for many purposes. Many people will use equity to draw out cash by refinancing their house; the cash may be use to finance other major purchases such as an investment property, making major improvements to your current property or funding children’s educational expenses.
The advantage of using equity in your home to access funds is being able to utilise the lower rate of interest, which is why many homeowners also use equity to consolidate other high-interest rate credit card debts or personal loans. Not only does it help reduce the size of the repayments, but also the number of different loans by consolidating them into a single loan which has a considerably lower interest rate.
Since last year, regulatory changes have resulted in investors experiencing tougher borrowing conditions from the major lenders. This has made the ability to use available equity from your primary mortgage for the largest deposit possible even more appealing. But it is the ability to consolidate high interest debts and reduce monthly outgoings by thousands of dollars that many Australians are attracted to. Remember, however, that borrowers must be able to comfortably cover the increase in repayments and budget well for the future to avoid credit card or personal loan debt escalating again.
Money magazine chief commentator, financial analyst and respected author Paul Clitheroe says: “Extending your home loan or taking out a single personal loan to cover all your debts can reduce the overall monthly repayments, however it’s not an instant cure-all.”
“Unless you stick to a tight spending budget you could end up accumulating other debts again."
Borrowers also need to be aware that extending a home loan to beyond 80% of the property’s value will usually incur mortgage insurance, says Mr Clitheroe. This can mean costs of hundreds, and sometimes thousands of dollars, which will negate the value of debt consolidation.
Always consult an independent financial advisor when looking to make changes to your financial situation.