Most people who have owned property for a period of time have accumulated quite a bit of equity in their homes, through disciplined repayments coupled with asset growth over time. Equity is the difference between the value of an asset (i.e. your home) and any outstanding debt against that asset (i.e. your mortgage).
Equity = Asset Value – Debt linked to Asset
Financial advisers will tell you that you should diversify your investments to manage risk and reduce your exposure to a single asset type.
Home Equity release products act as a line of credit, secured by the equity in your home. This mean that you will be pay lower interest rates, which are tax deductible as long as you invest in income producing assets such as shares. (See your Accountant to make sure)
The way it works is simple, take the following example.
Larry and Helen
Larry and Helen bought their house in Melbourne’s East for $240,000 in the year 2000. At that time they put down a 20% deposit and borrowed $192,000 from the bank, to be paid back over 25 years. Fast forward 15 years and Larry and Helen have had their property valued at $630,000 (which is in line with the growth in Melbourne over that period). They have kept up with their repayments over the years and now have a mortgage of $100,000.
The Equity in their home is calculated by subtracting the outstanding loan balance from the value of the property ($630,000 – $100,000 = $530,000 Equity).
Larry and Helen could refinance up to 80% of the value of their home without incurring Lenders Mortgage Insurance – 80% of $630,000 is $504,000. This means that they can access an additional $404,000 secured by their home to invest as they wish.
Note that for this example the suggested approach would be a split loan, with the $100,000 continuing to be paid down and the $404,000 investment component being interest only.
Equity release such as the example above doesn’t have to be for investment purposes – it could be to renovate, extend or to pay the kids expensive school fees. What the money is used for will impact the tax deductibility of the extra interest payments, so be sure to consult your Accountant to make sure it’s right for you.