So you’ve had your home for a while and you just found out you have equity – your property value minus the loan amount owing. But it can also help get you your first investment or build your portfolio if you refinance.
How does refinancing to invest work?
When you refinance to invest, you’ll have the option to find a lender who is offering you a competitive rate or features while saving money. However, you’ll be refinancing to use your home equity to invest.
What are the benefits of refinancing for investment?
Refinancing to invest is a good way to start your property investment journey without saving for an upfront deposit. The financial strain of saving while repaying your mortgage prevents lots of individuals from kickstarting their investment journey. If you’re in the position to refinance your home and use it to buy a second property, you could effectively:
- Decrease the time it takes you to buy that first investment.
- Open up areas for cash flow (from rental income).
- Potentially build up more equity from your investment.
- Avoid paying for Lenders Mortgage Insurance (LMI) with your investment.
What ways can I use my current home loan to invest?
There are a few ways you can use your current mortgage to invest. The option you choose will be dependent on your financial situation and how you plan to find your investment.
Accessing equity through loan cash out
One way to utilise your equity for investment is to cash out money through a home equity loan. The process works by getting your home valued and having the bank assess the amount of equity available. After working out the figures, you can borrow up to 80% of your property’s value and use it towards investing. You’ll refinance your home loan at a higher amount and cash out the remaining balance, which is available to use when you wish.
The main benefit of cashing out your equity is that you’ll be paying off your new loan through fixed repayments. With lower interest rates than other refinancing options and a traditional repayment structure you’ll begin paying off your debt sooner.
If you’re looking for an investment property this could be a downside since you have to pay for money you haven’t used, but having equity on standby in could be beneficial. You’ll also have the added benefit of not necessarily tying your new investment to your property of residence. Depending on your loan structure, this can remove the risk of having your home repossessed should you default or be unable to service your investment.
Accessing equity through a line of credit loan
Another way to use your property for wealth creation is to apply for a line of credit (LOC) home loan. The amount of equity you have in your home can change the LOC amount you’re eligible to borrow or spend; however, a LOC loan acts similarly to a credit card that uses your house as security.
You’ll have a set amount available for use and can draw funds during the “draw period”. During the draw period, you’ll only have to pay the interest based on the amount you draw or use. Some LOC loans may also require you to make minimum monthly repayments. The draw period depends on the terms and conditions of your loan, however most commonly goes on for 5-10 years.
After is the “repayment period”, where you’re required to repay the outstanding amount borrowed and interest by a certain time. During the repayment period you will no longer be able to draw money without refinancing again.
The main benefit of a LOC loan is that it offers flexibility and doesn’t require debts paid off straight away. Having funds on standby can be useful when you want to invest but are still searching the market.
However it’s harder to be approved due to their risk to lenders, as their flexibility can make it easy to forget about debts, putting you in a potentially damaging financial position.
They also have higher variable interest rates than traditional loans, meaning you have to be confident that you’ll be able to service the loan if interest rates rise.
What types of investments can I make?
If you’re planning on taking out a second mortgage and using your current home’s equity for investment, we recommend investing the money in something that grows in value over time and can partially service itself, i.e. property investments.
If you’ve found property in a high demand area, chances of tenant vacancy could be low, and that part of the rental income can help service the new loan.
To ensure you’re investing in a high-growth area, research which suburbs are in high demand and shown positive growth over time. Other factors that could affect growth are if the property is close by to:
- Public transport
- Shopping centers
- Or hospitals.
This is essential to making sure you purchase the right property and that you aren’t required to service your current mortgage and the investment.
Another area to invest your equity in is shares, though you’ll need to consider the state of the stock market for this. But if you’re looking to make financial returns, investing in property could be a good way to go.
How much can I borrow?
How much you can borrow and release in capital (equity) depends on your home’s value and how much is owed on your mortgage. To calculate your total equity amount, subtract the amount owing on your home loan from your property’s appraised value. However total equity and usable equity are two different amounts, with the latter being 80% of your home’s current value minus your outstanding loans.
Are there any risks I should know about?
Depending on the way you structure your loans, there is the risk of losing your properties. This will usually occur if you use your residential property as security for your investment loan or your investment. For this reason it’s advised to keep loans separated.
Another overall risk revolves around having a stable enough income to service both loans if required. One way to avoid this is hiring a property manager or agent that offers rental guarantees, or ensure you have landlord insurance.
Where to go from here?
Deciding to refinance for investment purposes is a substantial one, and shouldn’t be taken lightly. However, when done correctly, releasing your equity could be your path to wealth creation and portfolio building.
If you’re unsure where to go get started or simply want to know more about the process and if you’re eligible to refinance and release equity speak to us today!
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.