Owning your home or an investment property is a major financial milestone for many Australians. Yet, some are not aware of one of the most attractive perks of investing in real estate – tapping into its equity.

Home equity is the difference between the current value of your property and how much you owe on it. A property value of $500,000 and an amount left owig of $200,000 will leave you with a total equity of $300,000. This total equity will rise in the long-run with consistent principal loan repayments and property value appreciation.

Why is equity important?
Most lenders let you borrow against that built up equity for a multitude of uses such as home renovations, buying a car, starting a business, and even going on holiday. Importantly, equity can be used to refinance your current loan or even buy an investment property, a viable strategy and staple for those looking to build their property portfolio.

How does it work?
You have to take note that lenders will not lend against your total equity, but a portion of it called your usable equity. Generally, lenders will lend up to 80% (or up to 90% if you pay Lender’s Mortgage Insurance) of the value of your property – minus the outstanding debt you owe against it. There are a few online calculators you can use. The loan acts the same as any other, with P&I or IO options, and fixed, variable or split repayment types. The major incentive is that you don’t need to save for a huge deposit. Keep in mind that there are other factors that influence how much you can borrow, including your credit score, income, or any additional debts as normal.

Here is a brief breakdown of some of the advantages and things to consider when unlocking your equity of a property.

1. Significant amount of money can be borrowed to get another investment property quicker.

2. Potential tax benefits from interest paid on the investment loan.

3. No longer need a sizable deposit.

4. Interest rates are lower than personal loans, car loans.

5. Flexible loan terms compared to personal lending.

Factors to consider:

1. There are consequences of defaulting in that the bank can foreclose the asset used as collateral for the loan.

2. Upfront costs, such as application fees, appraisal fees, and closing costs, which can add thousands of dollars.

3. When using equity for a car loan or a holiday, borrowers need to be careful about having extended loan terms.

It is important to work with your trusted lender and/or financial advisor to determine if tapping into your equity is a viable option for you, given your individual circumstances.

Any advice provided is general in nature and should be considered in line with your financial situation, needs and objectives