Accessing Equity: Can You Afford It?
Exponential real estate market growth has provided Australian property investors with unparalleled opportunities for leveraging their assets to enhance their wealth. This is a rather fancy way of saying: property values have grown swiftly, allowing Aussies to loan heavily against their newly-revalued assets. But just because they can access their equity doesn’t mean they should.
With interest rates at historic lows, many Hatch Financial Services clients are sensibly thinking about building their investment portfolios by drawing down into the value of their existing properties. And depending upon your individual circumstances, using existing equity is a great way of acquiring additional assets for the future. As Hatch Financial Services’ recent blog explains, the equity which exists in your property is the difference between what your property is worth and what you owe. If your property is worth $400,000 and you have a loan of $300,000, you have $100,000 of available equity in your property. Banks will consider other existing debts and obligations, credit card limits, your income and other factors before deciding on the amount of equity they’ll let you access. They will allow you to borrow a maximum of 90 – 95% of the value of a property with Lenders Mortgage Insurance, and up to 80% of a property’s value without LMI – which can result in many hundreds of thousands of dollars of potential equity, depending on your property’s value.
Whilst this might send you into an excited frenzy, daydreaming of investment property deposits, holidays to Europe and fees for that must-attend private school – we recommend you think very carefully before drawing down upon your asset’s equity. Don’t think that accessing equity is ‘free money’ – it’s actually increasing your mortgage and digging back into the value of your asset which you may have been working hard to pay off for many years.
Before you consider using equity, think strategically about the kind of assets you feel are worthy of drawing down upon your mortgage for. We find many clients are interested in building their wealth with equity by purchasing additional properties, assisting family members to buy property, investing in shares or funds or renovating a home. Others still are interested in business investments, while some want to pay off credit cards or buy lifestyle items like cars or boats.
We encourage all our clients to reflect deeply on their goals and capacity for carrying debt. Just because you can draw upon your equity, doesn’t mean you should. You may be able to access your equity – but that’s only half the story. Can you afford to repay the lending? You are ultimately increasing your debt when you draw upon equity, so your current income will need to service your new loan repayments for investment properties, cars, holidays – whatever your focus.
For more information on accessing equity in your assets, reach out to Tim and the Hatch Financial Services team.