Many people dream of owning some investments one day. People look forward to owning something that will hopefully give them some money in the future. For a lot of people though, this dream never eventuates as lots of people think that they need to save lots of money before they can think about investing any money. Sadly, lots of people don’t know the tricks to budgeting and saving money so their dreams of investing remain on the “to do” list for many years.
Having a good control over your money is certainly the first stepping stone before you consider any investment. Saving sums of money will lever you into certain investments such as term deposits, managed fund, shares etc. However if you wished to invest in a property, it would be really difficult to save sufficient money to buy an investment property especially if you already owned your own home. So what can you do as an alternative?
Well if you already own a home you are likely to have some equity in it especially if you have had it a long time, paid a lot off your home loan or if property values have risen since you purchased it.
What Is Equity?
Equity is the difference between what your home is worth and what the balance of your home loan is. In other words it is how much of your house you actually own.
e.g. Jack has a property worth $380,000 and he has a home loan for $180,000. His equity is therefore $200,000.
Peter and Jan have a property worth $684,000. They have a two home loans totalling $249,000. Their equity is therefore $435,000.
How Does Equity Increase
There are a number of ways that the value of your equity can increase
1. Paying down your home loan
2. Paying out your home loan
3. Property values increasing
4. Improving your home so the property is worth more
How Do You Use Equity To Invest
Banks are generally willing to lend you money against the security of your house. They take a mortgage over your home which gives them the power to sell your home if you don’t repay your loans. They are often willing to lend about 80% of the value of a property. This means you might be able to take out a loan against your house and use that money to invest.
e.g. Jack’s property is worth $380,000. IF the banks were willing to lend him 80% of the value of his home, then they might consider lending him $304,000 ($380,000 x 80%). As he only owes the bank $180,000 on his home loan, he could have the potential to borrow some more money and to use this money to invest. He could potentially borrow up to $304,000 giving him access to $124,000.
Peter & Jan’s property is worth $684,000. IF the banks were willing to lend them 80% of the value of their home, then they might consider lending them $547,200 ($684,000 x 80%). As they only owe the bank $249,000 on their home loans, they could have the potential to borrow some more money and to use this money to invest. They could potentially borrow up to $547,200 giving them access to a further $298,200.
What Sort Of Investment?
Depending upon how much equity you have available, you could use your equity to invest in any sort of investment that suits you and your particular circumstances. You would need to speak with an accountant / financial adviser / real estate agent / share broker to discuss your different investment options. You would generally be looking for investments that have the potential to rise in value over time. These are called capital growth investments.
There are many tricks to investing wisely and you should always do plenty of research and consider all of your options and personal circumstances before making a decision where to invest.
Any loan you take out to buy investments is likely to have some sort of regular repayment plan. As an example you might have to make a loan repayment each month or you may have to meet an interest payment every quarter. You can explore your loan options with your loan broker / banker.
A lot of investments don’t give you sufficient income to meet the repayments on the investment loan (such as property) or if they do, the income may not come through regularly enough (your loan repayment might be due monthly, but an investment such as shares generally only pays dividends half yearly). Before you look at borrowing to invest, you need to ensure this new commitment sits well within your budget and that you can afford to carry additional loans.
There are risks with all forms of investing and these should be carefully considered before you make any commitments. A financial professional will be able to discuss these with you. Borrowing money doesn’t increase or decrease the risk of a particular investment. That investment would carry its own risks irrespective of whether you paid cash for the investment or borrowed money for the investment. The investment itself doesn’t change based upon where you sourced the money.
What additional risks you do carry if you borrow money to buy investments is that if the investment falls in value and if under a worse case scenario you lost all of your money, you would end up with a debt owing to the bank for something that you no longer own or was worth less than the loan.
You should therefore consider the strength of the investment and the likelihood of it going up in value over time. It might not be wise to chase speculative investments if borrowing money and remember any investment that looks too good to be true generally is.
Hopefully this article has given you some ideas how you can use your home equity to buy some investments. This article is intended as a guide only and naturally you need to speak with financial professionals who specialise in the fields of financing and investing so you can do the appropriate research before you decide whether or not borrowing to invest suits your individual circumstances. Happy researching and happy investing!