With many investors still hurting from roller-coaster-like share market fluctuations, bricks and mortar has become a more appealing investment option for some. Even if your shrunken nest egg is in better shape to buy a tent than an investment property, the latter may still be within your reach.
One solution may be to unlock the equity in your home to use as collateral for your new investment property. The amount of equity that your lender allows you to borrow is calculated by the value of your home, minus the balance of your existing mortgage.
How much you are able to borrow will also depend on your assets, financial circumstances, your existing loan's loan-to-value-ratio (LVR; the maximum amount you can borrow as a percentage of the value of the property) and largely on your credit history.
For instance, if your home is valued at $800,000 and you have a mortgage of $300,000 then the available equity in your home is $500,000. If you were to draw $100,000 from your equity as collateral for your investment property, then your new mortgage balance would be $400,000.
Not just for investorsA home equity loan, or line-of-credit loan, can not only be used for purchasing another property. Equity can also be used to carry out renovations to your home or to purchase new furniture.
Home equity loans may be a popular choice among renovators as interest rates are often lower than those for personal loans and credit cards. The current average advertised rate for line-of-credit loans is 7.25 percent, compared to the average standard variable personal loan at 9.95 percent.
The danger with using equity to finance renovations, compared with a personal loan, is that there is no set period that the home equity loan balance needs to be repaid by. This type of secured loan is regarded as an interest-only loan as you are only required to repay the interest charged on the funds you use, which is charged to your account on a monthly basis.
This means that the balance can exist for the life of your mortgage and therefore you may be paying off a minor renovation for 25 to 30 years, which can really add up.
There are 265 mortgages with a line-of-credit facility monitored by RateCity, so do your research and shop around to make sure you're getting the best deal for your situation.