Are you dreaming of owning a second property –  maybe a holiday home or a rental? Or perhaps you are considering rennovating, paying off some debts or investing in shares? If any of these are on your radar, you’ll be pleased to know that you can use your existing home equity to secure the finance required to achieve anyone of these financial goals.

In simple terms, as your property increases in value, the amount of equity in that property will go up. You can then refinance your mortgage to access that increased equity. This process is called leveraging and is a powerful strategy for wealth creation.

How to leverage your equity

Leveraging the equity in your existing home to purchase a new investment property is a simple concept. Your home’s equity is the difference between your current property’s market value and the balance of your mortgage. If you’ve owned your own home for a few years, there’s a good chance you’ve already built up a reasonable amount of equity and you can use this to purchase your investment property.

So what exactly does leveraging your equity mean? Essentially, it’s borrowing to increase the potential of return on your investment, in this case, your second property. For example:

• Imagine if the existing value of your home is $500,000 and the balance of your mortgage is $300,000.
• The difference between the two is $200,000 and this is your home equity.
• As an investor, you can access up to 80 per cent of this amount without having to pay Lender’s Mortgage Insurance, leaving you with $160 000 to use as a deposit on your second property.

By using your equity in this way, you minimise your risk as you’re not using your actual cash reserves or savings. If it's a second property you're interested in, then saving for a deposit can take a long time and in that period the price of the property you want to buy may increase substantially. So by using the equity in your home, you benefit by getting into the property market now, at today’s prices, and you can enjoy the increase in property values that time brings.

Refinancing

Accessing the equity in your current home will require refinancing your mortgage at its increased value - thereby releasing some of the equity for other purposes. The first step is to speak with a mortgage broker who will arrange to have your property valued by a qualified valuer.

"If your home is located in a good area and the lender is happy with your creditials, then they may release up to 80% of the property's valuation", says Carissa Louca, Mortgage Broker from Collins Home Loans.

How to structure your loan

There are a number of ways to structure your new loan and the two most common methods is either a lump sum payment or a line of credit loan. 

A common approach is to use a Line of Credit loan, which means that your loan will be approved up to a certain amount, but you will only pay interest on the portion that you use - the rest just sits there to draw up on if and when you need it.

The line of credit can be linked to an offset account to reduce the amount of interest that your loan accrues, without increasing your repayments. A mortgage offset account has the benefit of being able to save you interest and cut the length of a home loan.

The negatives associated with a Line of Credit loan include risky spending behaviour, interest rate variability, an increased amount of discipline and consistent repayments to avoid any mishaps with your repayments. A line of Credit loan often carries higher fees and sometimes a higher variable interest rate than a basic loan.

Carissa Louca agrees there are risks, "But taking out a line of credit can be a smart move in a number of different scenarios such as in the case of debt consolidation or to invest in property or a new business. Just be sure you consult wiith a qiualified mortgage broker before you proceed to ensure you have all the facts - and that includes undestanding the risks as well!", she says.

Releasing the equity as a lump sum payment can also be a useful strategy when you have a specific purpose in mind such as a deposit for another property or a rennovation. Again it is a good idea to speak to your mortgage broker about your specific situation before you proceed. It is important to remember that the moment the loan settles, your mortgage will increase to the amount you borrowed and you will be paying interest on that lump sum. 

Are home equity loans a better option that personal loans?

As a general rule, home equity loans offer better interest rates and lower fees than personal loans as they are secured against an asset - namely your owner-occupied home. Where personal loans are beneficial is when you don't own your own home or your don't have enough equity in the home to refinance.

Important Tips

1. Consider all your options
   It is important to be sure that refinancing is your best option before you proceed. Consider seeing a qualified Financial Advisor before you progress.
2. Only borrow what you actually need.
   Dont get into the trap of borrowing money for frivolous items. Focus on your financial goals and match your borrowings to those.
3. Not all Line-of-credit loans are created equal so be sure to work with a mortgage broker to compare each lender's products, so you can be sure you are getting the best deal.

Disclaimer: The information provided in this is article is general in nature and is not intended as financial or investment advice and should not be relied on as such. You should always seek your own independent advice from qualified specialists as per your own specific circumstances.