If you’ve owned your own home for several years, the chances are that your property has increased in value at the same time that your mortgage has reduced.  This equity in your home can be a potential gold mine because you can borrow against it to invest, allowing you to harness your home’s financial potential.  Many people get nervous about ‘betting the house’, and this strategy isn’t right for everyone, but in the right circumstances it can significantly increase your wealth over the long term.

Home Equity Loans

Home Equity Loans allow you to access the equity in your home even if you’re not yet ready to sell.  A lender will loan you a proportion of your home equity which you can use to increase your investment portfolio, to renovate or improve your property and increase its market value, consolidate your debts, or even start a business.


Understanding equity

The ‘equity’ in your home can be thought of as the profit—the difference between how much your property is now worth, and how much you owe on your mortgage.  If you have owned your home for many years, your amount of equity has the potential to be in the hundreds of thousands.

An Example—Home Equity Loans

Kate owns her own home.  She purchased it 15 years ago for $300,000.  Over that time she has worked hard to pay down her mortgage which is currently at $75,000.  In addition, the values of homes in her area have increased substantially over that same timeframe.  Her home has been appraised at $700,000.  The equity in her home would be $625,000— the current value ($700k) minus the current balance of her loan ($75,000).  Kate obtained a loan for $500,000 (80% of her equity) which she used to add a second storey to her home and increase its market value.


The potential benefits of Home Equity Loans

Lower interest rates:  Generally, home equity loans offer lower interest rates than other types of investment loans.  Because the loan is secured by your home, these types of loans are considered less of a risk to lenders.

Tax deductable interest:  Often the interest associated with home equity loans have the added benefit of being tax deductible.  This can help you maximise the financial benefit of investing.  Talk to our expert financial advisers to find out how you can make your loans tax deductible.

Put your home equity to work:  Many homeowners with equity do not harness this investment potential.  Home equity loans can help you to unlock the added value to your home without having to sell.


Things to keep in mind about Home Equity Loans

Risk to your home:   The most obvious downside to home equity loans is the risk that if you default on your loan that your lender will sell your home to pay out the loan.  If you are considering a home equity loan you need to understand that if you are unable to make your repayments, that you may potentially lose your home.

Increased liabilities:  When you borrow from the equity in your home you are reducing the amount of your home that you actually own and increasing your liabilities.

Longer home loan horizons/ more expensive mortgage repayments:  By adding to your level of debt, your home loan will take longer to pay off, or your repayments will increase.


 Get Expert Financial Planning Advice on Home Equity Loans

Our financial advisers in Sydney can offer you financial advice in the areas of investment planning.  We can assist you to discover whether a home equity loan could be the right investment strategy for your circumstances as well as other investment and financial planning strategies to harness your financial potential.  Call us today on 1300 886 018 or visit our website to find out more:  Sydney Financial Planners


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