Using the equity in your home

INCREASING property prices over the last 10 years means many people now have a large equity in their home.

However, this does not mean that they should automatically borrow against it.

The term “using the equity in your home” usually means to mortgage it to borrow for investment which can be a useful strategy in some cases, but remember all the equity in the world is useless unless you have the cash flow to fund your borrowings. The extreme example is the single pensioner living in a million dollar home in the best suburb. 

You also need to be aware that borrowing always involves some degree of risk, even if its only a slight one, and you should not be borrowing if you do not need to do it. 

Sure, you may be inundated with offers from lenders who will try to talk you in to borrowing against your equity but all they are doing is filling their sales quotas. 

If you are thinking about borrowing to invest, your first step should be sit down with a financial adviser and work out whether your present assets are sufficient for retirement. If they are not the adviser can help you work out a strategy to help you get there. This may well involve salary sacrifice to superannuation and diversifying into share based investments.

It also may be necessary to borrow for investment as part of this strategy,  but part of the financial planning process includes preparing a budget so you can see what is a safe amount to borrow.  

Usually it is best to have your investment loan on an interest only basis while you contribute an additional sum each month into insurance bonds or superannuation. This minimises your commitment while giving you a safety buffer.

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