How can I use equity to invest?
6 min read
Many property owners have seen excellent gains in the value of their homes over recent months, whether this be owner occupied or investors. The reason being, particularly in capital cities, dwelling value growth has been very strong. In fact, in Melbourne, homes have increased in value by over 16% in the past 12 months alone.
What does this mean for my equity?
Assuming you haven’t recently increased your home or investment loan borrowings, and have been making principal reductions, you will likely have equity in your property. Read this if you don’t know what equity is. You can utilise this equity for a range of different reasons including buying an investment property, renovations, consolidating debt or investing in shares.
Why should I care about equity?
If you are someone who wants to grow their wealth via other avenues outside of paying down your debt or saving cash, equity can be a very useful tool. It’s how property investors have historically been able to buy and hold multiple properties without needing to increase their income.
For property investors, despite strong capital growth in the property market, rental yields have been dropping. The pandemic has also meant some landlords aren’t receiving rent at all and for a long time could do nothing about this but wear the loss.
On the other hand, the share market has been going gangbusters over the past year with the ASX hitting record highs many weeks in a row. Share price growth and dividend yield has been quite strong in comparison to rental yield.
Why might I invest in shares as well as own property?
The biggest factor is diversification. Holding your wealth across a range of asset classes spreads the risk and generate more stable returns. In many respects the share market is more accessible than the property market:
- No stamp duty
- No minimum or maximum investment period
- Minimal ongoing management costs
- Diversify risk by spreading risk across a number of investments in different sectors
- You can invest with a minimal amount of money
A property purchase generally requires 10 – 20% deposit plus stamp duty and establishment costs if lending is required. In Melbourne this might be a minimum investment $128,000 (20% + stamp duty) on a $500,000 purchase.
The downside to investing in shares is higher risk and price volatility, the value of shares does shift daily and returns are not guaranteed. You need to be prepared for movement in the value of your investment. Capital gains tax is also applicable and paid on the increase in value of shares at the time of sale.
How could I use equity to buy shares?
Did you know you can use equity in your property to fund investments in managed funds and shares?
- Many banks allow for “equity release” in their credit policy to invest in a manage fund or buy shares. Banks generally require the borrower to appoint a qualified advisor to complete a Statement of Advice which is tailored to your investment risk profile.
- Interest paid on the equity release may be tax deductable (you’d need to get independent tax advice though, this blog does substitute not tax advice).
- Finally, investment loan rates are very competitive at 2.29% fixed or 2.49% variable*.
We are here to help you through all stages of the process from advice on investments to funding them.
* Fixed comparison rate 3.72% (Bank of Melbourne 2 year fixed investment rate under Advantage package) and variable comparison rate 2.48% (Macquarie Bank Variable investment rate under offset package) – Both rates assume a loan to value ratio of equal to or less than 80%.
This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. (if relevant: before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement).