Insights

Leveraging The Equity In Your Home To Build A Property Portfolio

A family enjoys a sunny day at their home pool. Two adults relax on chairs, while a child jumps into the water and another sits at the pool's edge. Their two-story house, boasting large windows and siding, enhances the property portfolio's charm in the background.

Unlock the Power of Your Home to Invest in More Property

As house prices continue to appreciate, your property may offer you more than a place to live. Instead with the equity you’ve built up over the years, you may have a powerful tool for wealth creation at your fingertips. By leveraging the equity in your home you can invest in an additional property – or even properties! – to build a diverse portfolio, and set yourself on a path to financial growth.

However, while this opportunity might be within reach, many people aren’t quite sure how turn this equity into earnings. In this article we look at how to strategically use your home equity to expand your investment opportunities, and some key considerations to keep in mind.

Understanding Home Equity

Home equity is the portion of your property that you own outright, calculated as the difference between your home’s current market value and the outstanding balance on your mortgage. For example, if your home is worth $1,400,000 and your mortgage balance is $650,000, your equity is $750,000.

As you pay down your mortgage, or as your property’s value rises, your equity increases. This accumulated equity can be used as collateral to secure financing for additional properties, allowing you to invest in real estate without needing to save a separate cash deposit.

How Can You Leverage Your Equity?

Leveraging equity involves borrowing against the value of your home to fund another investment. In New Zealand, lenders typically allow homeowners to borrow up to 80% of a property’s value if purchasing a property to live in (eg. owner occupied), or up to 70% when purchasing a rental property – though this may vary depending on individual circumstances and lender policies. The difference between this maximum borrowing amount and your current mortgage can be accessed as a deposit for a new property.

For instance, if your home is valued at $1,400,000, you could potentially borrow up to $980,000 (70% of the value) to purchase a rental property. If you currently owe $650,000 on your mortgage, that leaves up to $330,000 that could be used towards purchasing another property. This ability to use existing equity as a deposit significantly lowers the barriers to entry for expanding your investment portfolio.

Why Use Equity to Invest in Additional Properties?

Leveraging your home’s equity to invest can provide several advantages, making it a popular strategy among seasoned investors and newcomers alike.

  • No Need for a Cash Deposit: Instead of having to save up for a traditional deposit, your home’s equity can be used, allowing you to enter the market sooner. This is particularly beneficial in a rising market where saving for a deposit could mean missing out on potential capital gains.
  • Accelerated Portfolio Growth: By using your equity to purchase more properties, you can take advantage of compounding capital growth across multiple assets. This approach enables you to build a portfolio faster than if you were relying solely on savings.
  • Diversified Income Streams: As you build a portfolio, owning multiple properties will allow you to generate rental income from various sources, which can help mitigate risk. If one property experiences a period of vacancy, the income from others can help support your overall financial position.

Key Considerations Before Leveraging Equity

While there are clear benefits to using your equity for property investment, it’s important to approach this strategy with careful planning. Here are some factors to consider:

  • Debt Servicing Ability: Borrowing more money increases your financial commitments. It’s crucial to ensure you can manage repayments on both your existing mortgage and any new loans, especially if interest rates rise. Lenders will assess your income, expenses, and overall debt levels to determine how much you can afford to borrow.
  • Market Risks: Property values can fluctuate, and while long-term growth is typically strong in New Zealand, there are no guarantees. It’s wise to consider how market downturns might affect your investment and whether you could sustain the property during challenging periods.
  • Regulatory Requirements: Being a landlord in New Zealand involves meeting certain legal obligations, such as compliance with the Healthy Homes Standards. Understanding these requirements is essential for maintaining your investment and avoiding unexpected costs.
  • Interest Rate Strategies: Whether you opt for a fixed or floating interest rate can significantly impact your cash flow and investment returns. Some investors may choose to mix the two to balance the certainty of fixed rates with the flexibility of floating rates.  

Loan Structuring for Property Investors

Loan structuring is a key aspect of successful property investment, and it goes beyond simply borrowing as much as you can. Thoughtful loan structuring can help maximise your cash flow, reduce risk, create tax efficiencies, and set you up for future growth. Strategies such as interest-only loans for investment properties, or using offset accounts to reduce interest expenses, can be useful depending on your financial goals.

Understanding how to effectively use these tools is essential, as is the ability to tailor your approach based on changing market conditions and personal circumstances. A nuanced understanding of the lending landscape and property market can provide a distinct advantage when structuring loans for long-term success, which is why it is so important to seek professional advice.

Unlocking the Potential of Your Equity

Leveraging your home equity to invest in additional properties is a well-established strategy for building wealth, but it requires careful planning and expert advice. With the right approach, it can help you diversify your income sources, grow your investment portfolio, and achieve substantial financial gains over time.

If you’re considering using your equity to invest in more property, we are here to help. Get in touch with one of our Threefold advisers for a free consultation to explore how you can unlock the potential of your home equity and take the next step in your property investment journey. Click here to book a free consultation with a member of our team.

The content of this article should not be taken as financial advice, or a recommendation of any financial product. These insights are based on current economic commentary, market pricing for interest rates, and our personal opinion. Threefold is not liable or responsible for any information, omissions, or errors present.

 

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