Australians love property but the idea of property investment—and where to start—can be daunting. One way to get started sooner is by unlocking the value in your home to invest. But it pays to understand the risks as well as the benefits.
Using your home to invest
Many Australians are releasing some of the value in their own homes to buy an investment property. And when you consider the potential tax advantages, it could make financial sense to buy a second property while paying off your home loan. When you own an investment property, you can often claim a tax deduction for the interest you’ve paid on your loan and many other expenses related to the property.
It’s a matter of weighing up what’s most important. For some people, clearing the home loan is the number one goal. Others prefer to take on extra financial responsibility with a view to buying an investment property that may:
- Increase in value over time (providing capital growth) and
- Provide an extra source of income down the track.
If you have to save-up first, it could be years before you can buy an investment property. And during that time, property prices may increase, making it harder for you to get a foothold. On the other hand, if your home loan is out of control already, your first priority might be to get on top of your existing debt.
How can I release the value in my home and what are the risks?
At any given time the amount of equity in your home can change depending on:
- The value of the property and
- The amount owing on your home loan.
Say your home is worth $500,000 and you owe $200,000 on your loan, you have $300,000 in equity. You can release some of the $300,000 by borrowing a proportion of it and using it to invest.
Before you consider this type of strategy, it’s important to understand the risks. Say interest rates rise more quickly than you’d expected―if you’re unable to cover the increase in loan repayments, you may not only lose your investment property but put at risk the home you released the equity from. So it pays to explore the possibilities before putting all you’ve worked for at risk.
Should I buy an investment property?
So should you buy an investment property? It really depends on you, your situation, your financial goals and attitude to risk―which is why getting the right advice is always a good place to start. Like any property, you should also be careful about what and where you buy. Spend as much time as you can researching, and make sure there are no structural issues with your property.
Speak with your financial planner before deciding whether or not to consider unlocking the value in your home.