Your home is more than just the place you live – it's a powerful bargaining chip for investment. For many people, mortgage repayments made over the years are just seen as paying down debt, slowly owning more of your North Shore property until the debt is completely settled.
While this is true, those repayments build more than just ownership – they create equity.
Essentially, equity is money you have built up in your home. Let's say you purchased a property for $300,000 and used a 20 per cent deposit ($60,000). From the outset, you have $60,000 of equity (inherent value) in your property!
This will grow over time as you make mortgage repayments. Your equity is the difference between the home's value and your outstanding debt, so after you pay off $60,000 of your loan you will have $120,000 in equity.
Repayments aren't the only thing that build equity – capital gains will too. If a $300,000 property increased in value by 10 per cent, that extra $30,000 is also added to your equity. If you live in an area with strong capital growth like the North Shore, this equity can build up very quickly. But how do you use it?
You can use this equity to buy a second property – a process called leveraging. This can work as a deposit go towards another home, or to purchase it outright if you have built up a significant level of equity.
This is how many property investors can rapidly expand a portfolio.
This is how many property investors can rapidly expand a portfolio. Rather than selling their property, paying down the mortgage and using the profits to buy another property, they retain the positive cashflow from renting it out and leverage the equity to buy another investment.
While it seems like a great idea, there are many risks and requirements that everyone needs to take into account.
It is important to note that leveraging equity is still removing money from your first home, or at least putting it up as collateral. This can increase your risk, and some lenders won't approve the process if you're taking out so much equity that you end up with less than 20 per cent left in your first home. Under Reserve Bank speed limits, this could rise to 40 per cent for investors.
Your mortgage serviceability is also very important. You're essentially refinancing a home loan, or even taking out a second one – if your cashflow isn't good enough to cover repayments, then you can leave yourself in financial dire straits.
And then of course you're managing two homes at once. While the team at Ray White excel at property management on the North Shore, you'll also have to make sure these homes are tax compliant – remember, investment property yields are a source of income!
We're not trying to scare you off with all this information, trust us. But if you're weighing up your options and leveraging equity instead of selling property is on your radar, you have to understand the risks. Speaking to a financial adviser or a mortgage broker about whether it'll work for you is always a good idea.
For more advice, speak to your friendly, local mortgage broker or an accountant – we can help you buy or sell as necessary. At Ray White Takapuna, we've got years of experience helping people out in an increasingly tight property market. Whether you're leveraging equity to find an investment, selling the family home to downsize / upsize or simply looking to find the dream North Shore home, we'll find you something to suit.