Using Your Home Equity Loan to Fund Business Growthcsadmin
If you’ve owned your home for a few years, there’s a good chance you’ve built up some reasonable equity, and this can be a valuable resource when it comes to property investment. Ask any property investment expert and they’ll say that the equity held in your property can be a powerful tool for wealth creation when used wisely. This article will dive into how to use your home equity loan to help with business growth.
According to the Reserve Bank of Australia, Australian house prices have increased on average by 7.25% per year over the past 30 years. That’s plenty of available equity for business owners seeking capital to support growth.
Fundamentals of Home Equity Loans
A home equity loan is obtained by making use of the equity that you’ve built on your home. For example, if your current home value is $500,000 and your first mortgage loan is $400,000, the home equity value is $100,000 and you are able to obtain a loan of that value. Simply put, if your property increases in value, the amount of equity held in that property will go up as well. You can then access the increased equity to stump up your deposits. Keep in mind, you can’t use all your available equity. Since the bank is lending you money against the value of your home, they won’t lend you the full amount because if house prices dip, they don’t want to an outstanding loan that’s worth more than the asset. Typically, banks will lend you 80% of the value of your home, less the debt you still owe against it. Consider this your useable equity. However, it’s possible to borrow more than 80% if you take out Lenders Mortgage Insurance.
Gradually paying off your mortgage will increase the equity in your home by reducing your debt, but the real difference is made by fluctuations in your property’s value and capital growth. Mortgage broker Michelle Coleman suggests a strategy to maintain equity increases even in times of negative capital growth; adding value to your property through renovation, subdivision or construction. This can also speed up the rate at which your equity grows during positive capital growth. Get a feel for what the price of a renovation could be by obtaining quotes and speaking to others in your local area who may have recently renovated. “You can actually lend against the cost of the renovation if it’s done through a registered builder,” says Coleman. “It’s very similar to a land and construction scenario where you have the plans and the building contract, and the bank will then lend against it. So you can actually reduce the amount of money that you have to put into the renovations if you want to.” Doing this could uncover costs you may not have planned for or thought about.
However, it is important to be aware of the disadvantages like risking the loss of your home to foreclosure if you fail to pay on time. Therefore, it’s important to have a solid financial plan, consider your business objectives and repayment affordability ahead of using a second mortgage or a cash-out refinance loan so that you can keep up regular payments. This should include a buffer fund to account for future expenses such as repairs, interest rate rises, vacant periods or any shortfall in rent versus fees and repayments.
Many property investment gurus say it’s important to repay the loan on your home as soon as you can. The equity that is drawn down from your home to purchase an investment is tax effective, but any remaining debt on your home isn’t. Therefore, the loan on your home costs you much more on an ongoing basis than the loan on your investment property.
Types of Home Equity Loans
There are two main methods to take out home equity loans and establish your new business using the returns. One option is to take out a second mortgage, and the other option is to go for cash-out refinancing. Both ways will enable you to get extra funds for business financing. In fact, the funds received from these resources may be used for any monetary purpose and you don’t need any particular plan to be eligible for the loan. As one of Australia’s leading Second Mortgage Lenders, Credit Solutions Group provide Second Mortgages to companies and to individuals who wish to borrow for business purposes. You may also opt to refinance your current mortgage loan for a sum that is in excess of what you actually owe on your home loan and make certain that the lender consents to a cash-out refinance policy when the overall debt on your home loan is either equivalent to or below 80% of the home value.
Another way to structure your home equity loan is a line of credit. A line of credit enables you to diversify and manage your investments, with separate sub-accounts for each investment. This means that you will only start paying interest on what you decide to spend. Your line of credit can also be linked to an offset account to reduce the amount of interest that your loan accrues, without increasing your repayments. For example, if you have $50,000 in your offset account and have a $200,000 loan, you’ll only be paying interest on $150,000. Offset also offers the added advantage of being able to use it as a transaction account so you needn’t worry about redraw restrictions if you want to access the extra repayments you’ve made on your loan. You can get your salary paid into your offset account and pay off your mortgage faster or save money on interest, but also have that money there whenever an investment opportunity comes up. As an alternative, you may be able to release equity as a lump sum, which is only a useful strategy if your investment plans justify the amount that you’ll ultimately be dishing out on interest repayments. This means you have to be aware that the second you take that money out, you’re increasing your mortgage and paying interest of around 7% on that lump sum. So as long as what you’re spending it on is making you 7%, it can be a worthwhile strategy. The big difference is that if you take out a lump sum, you would be accruing a significant amount of interest from the get-go and have to pay interest on the whole sum, whereas if you get a line of credit, you only have to pay interest on the amount you use.
Other strategies include cross collateralisation which involves using the equity from your existing property as security for loans on both properties. So instead of releasing your equity to use as a deposit for a separate investment property mortgage, quite often with a separate lender, your loans will be linked by the fact that the equity in one property is used as the collateral for both. In other words, if you cannot service the debt on one of the properties, then the bank can repossess both. It’s a risk that could be worth taking. For example, if the level of debt that you have on your existing property prevents you from traditional refinancing, then cross collateralisation may provide another means of getting a foot on the property investment ladder. However, if you’re not sure you’re going to be able to cover both mortgages, then cross collateralisation can become dangerous for your finances.
Final Things to Note
Another important thing to note is that the property that you live in is not the only source of home equity. You can also use the equity in an existing investment property to help fund the purchase of another investment property.
Using equity will not be suitable for everyone, and it is important to understand both the risks and benefits before deciding on this option. Above all, remember to play safe. If you don’t have any funds outside of your home equity, then it’d be risky to use all of your usable equity for property investment. You always some funds in reserve just in case, even if it means you can’t invest for a while, to keep yourself protected.
Speaking to mortgage lenders like Credit Solutions is your first step to accessing your usable equity. We are also available to answer any other questions you have about your investment choices, so be sure to check out our products on our products tab! Call us at 02 9199 7477 or contact us to find out more on short term caveat loans or our other credit solutions options provided – such as first and second mortgage loans, mezzanine financing, and construction financing.