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How to invest in property using a line of credit or home equity loan
If you're an owner-occupier looking to invest in property, a line of credit loan can make the equity in your home work for you.
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If you're looking to invest in property, a line of credit loan could be a great way to leverage the equity in your existing property for a deposit. A home equity loan is a loan in which you put your property up as security to borrow against the equity of your home.
Compare line of credit loans and access your equity
What is equity?
Equity is the difference between the current value of your property and the amount you owe on it. For instance, if your home is worth $700,000 and you owe $500,000 on your home loan, you have $200,000 in equity.
You build equity in your home in two ways: through making your regular home loan repayments and through price appreciation. If you've been paying your home loan for a number of years, you will have reduced the principal, or initial amount you borrowed. At the same time, your home may have increased in value. The combination of the increase in value and the reduction in principal adds up to equity.
How does a line of credit let me access my equity?
A line of credit loan usually allows you to borrow up to 80% of the value of your equity, and this amount is given to you as a credit limit. You can use as much or as little of the credit limit as you like, and you're only charged interest on the amount you use.
How can I use a line of credit to invest in property?
You can use a line of credit to form the deposit for an investment property. If you have a significant amount of equity in your home, a line of credit loan could potentially account for most or all of your deposit.
A line of credit loan only requires you to pay the interest portion of the loan until you reach your credit limit. This can be a savvy move for property investors, as interest repayments on investment properties are tax deductible.
If you don't use your entire credit limit for a deposit, you can also set aside part of your line of credit for any urgent repairs or maintenance on your investment property. This can help you manage your cash flow.
You'll most likely need to couple your line of credit with an investment home loan.
What are the drawbacks of using a line of credit loan to invest in property?
While a line of credit loan can help you invest in property sooner and carries significant tax advantages, there are some drawbacks.
First, using a line of credit loan to invest in property could potentially see you managing three home loans. Between your owner-occupier home loan, the line of credit and an investment loan, using a line of credit for property investment can be cumbersome.
Another drawback of line of credit loans is that you're using your own home as security. This means that if you run into trouble repaying your line of credit when it's due, your lender could seek recourse through your property and, in the worst case scenario, could even foreclose on your home.
What are some tips for using a line of credit for property investment?
Using a line of credit as an effective property investment tool requires some strategy. Here are some tips to keep in mind:
- Try to avoid using your entire credit limit. Leave yourself a buffer so you don't have to make principal and interest repayments on the line of credit.
- Leaving a buffer also allows you to use your line of credit for repairs and maintenance
- Devote extra funds to repaying your owner-occupier home loan. This unlocks more equity and minimises your non-tax deductible debt
How do I compare line of credit loans?
Line of credit loans are relatively straightforward products, so the best way to compare them is to analyse the interest rates and fees.
Line of credit loans come with higher interest rates than typical home loans, and rates can vary substantially from one lender to the next. It's important to compare to make sure you're getting the best deal available.
Most line of credit loans also carry ongoing fees. This covers the administrative cost of managing the loan account. These fees are typically charged monthly.
Some line of credit loans are also available as home loan packages. A package offers interest rate discounts along with discounts and special offers on other financial products. These typically charge higher fees, but these fees could easily be offset by the savings offered on other products.
If you've been diligent in repaying your home loan, and if you've been lucky enough to see your home grow in value, a line of credit loan could offer a great way to put your equity to work for you. But, as with all financial products, it's important to compare your options and consider your own financial situation before you make a decision.
Check out investment home loans
Image: Shutterstock
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Ask an Expert
Hi My Aunty owns a motel out right. We are wondering if she could get an equity loan or line of credit for $200,000. She owns to properties. Motel which she leases and a residential property. Total value is $550,000
We await your reply.
Thank you.
Hi Kerry,
Thanks for your question.
Kindly note that a line of credit or home equity loan is an amount of money you can borrow using the equity in your home, which represents the difference between the value of the property and any amount owing on it. Generally, it will be a home property which will be used as collateral for the loan and not a business property.
Cheers,
Anndy
Hi, my parents house would be valued at approx $450k and owe $290k. They are selling to me for the balance $290k and I have $100k cash.
I want to build another 3 bed property on the back of this house without subdividing and then buy more properties.
What am I best doing with the 100k and loan type to do this?
Many Thanks.
Hi Nhouse,
Thanks for your enquiry.
You might be interested to compare a range of construction loans some of which will also be suited for investment purposes. I also recommend getting in touch with a licensed mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that’s more inclined to review your application.
Thanks,
Belinda
I am in Indonesia, how can or able me to accept loan from Australia financing companies
Hi Purbapaktwo,
thanks for the question.
At the current time, Australian line of credit loans require that borrowers have Australian property to secure the loan against. You might want to try comparing loans from Indonesian lenders to see what your options are.
I hope this helps,
Marc.