What you need to know about leveraging your property
Whether it’s your home or an investment property, one of the benefits of owning a property is, it will generally increase in value over a number of years.
By leveraging your property, you will have access more money.
In simplistic terms, leveraging means borrowing more money against your current property’s value as a means to access cash to invest or for other purposes.
Why leverage?
Some people can be reluctant to borrow more money, as they see it as a risk and obviously, the money will need paying off eventually. However, there are many reasons why people leverage.
For instance:
- Debt consolidation: it’s often a cost-effective way of paying off credit card debt because the mortgage interest is lower than the credit card. This can save money in the long run in terms of repayments, thus making it easier to repay the loan.
- Fund large expenses: Some also leverage to take that dream holiday or pay for the kids’ higher education.
However, many see it as a tempting opportunity to either make lifestyle changes, or a strategic one potentially make more money later down the track.
- It can fund a home renovation, thereby improving lifestyle and potentially the value of the home.
- If the property allows, homeowners may consider using the funds to build a granny flat; this can then be rented, and the additional income can be used to pay down the debt.
- Equity can used to purchase an investment property, and make money both in terms of rental income, and potential capital gains.
Tax benefits
If you are leveraging to purchase an investment property, or indeed a granny flat, the interest on the equity loan is tax deductible.
Property investment offers many potential tax benefits, and this can further reduce the cost of borrowing against your property.
What you need to consider
- Know your finances
First and foremost, have the property valued so you know what potentially you can borrow, and speak to a financial specialist, such as a mortgage broker, to see what the leveraging options are for your financial situation.
- Understand the implications
You will need to think about the implications of a larger loan. Can you afford the increase in mortgage payments? Is there an option to extend the period of time the loan is paid off, thereby potentially decreasing the monthly payments?
If you’re looking at an interest only mortgage, plan for when the interest-only period of time ends.
Make sure your financial adviser explains everything thoroughly, so you fully understand the implications before your sign on the bottom line.
Risks of leveraging
There is always a risk when you use your property as collateral for a loan; if you are unable to make the required payments, you could potentially lose your home or investment property.
Using your property equity for lifestyle expenses can increase your overall debt levels. Some may argue this makes it harder to achieve financial stability in the long run.
Changes in the property market, interest rates, and economic conditions can also impact the value of the property and the ability to repay loans.
How to mitigate the risks
While there are risks involved in leveraging, with the right strategy and plans in place, risks are reduced, and we believe it can be used to build wealth and financial freedom.
Seek the professional advice from a financial advisor so you can have a solid financial plan in place.
Come and talk to us! We’ve been in the business of buying and managing properties for 50 years; we know what makes a good investment property, and what you need to consider when it comes to locations.
If you are leveraging your home to buy an investment property, and you’ve seen one you’d like to purchase, come to us for an independent honest opinion.
Our experienced team will tell you what you need to think about, what costs to consider and what you can do to enhance the property.
We’re local and family run, and we’re committed to helping you get the best from your asset, so you can reap the rewards in years to come.
Find out more about our property management services by giving us a ring on 02 4956 9777. Alternatively, send us an email to mail@newcastlepropertymanagement.com.au or pop into our Cardiff office.
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