If you own a home but lack the capital to invest, one solution is to use the equity in your home to fund an investment.
What is Equity?
Before going any further, let’s explain what equity is. With everything you own, there are assets and liabilities. If you own a car worth $20,000 (the asset), but still owe $5000 on the loan (the liability) the remaining $15,000 is the equity of the car.
The calculation is very simple: Take the value of an asset, subtract the liabilities, and what remains is the equity.
If you have owned your home for several years and have been making principal and interest repayments on your home loan, you will likely have a considerable amount of equity available in your home.
Let’s use an example. Ten years ago, a typical Melbourne house price was $450,000. A 10% deposit on such a home would be $45,000, requiring a home loan of $405,000. An average interest rate on a principal and interest loan in 2008 was around 5.5%, which would result in approximately $5,500 in principal repayments per year for this loan.
After ten years, the equity in this home would be substantial. Add up the deposit ($45,000), ten years of principal repayments (55,000), and ten years of price growth ($450,000) and you can see that the equity in this house is worth $550,000.
As this example shows, someone who has owned their home for ten years or more could have hundreds of thousands of dollars that they could use to fund an investment, even if they don’t have any saved capital to invest.
A reverse mortgage is an equity release where you use your home as security to borrow money. The loan can be taken as a lump sum, a stream of regular income, a line of credit, or a combination of these options. Interest is charged like any other loan, except you don’t have to make repayments while you live in your home. Instead, the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.
While all reasonable care has been taken in the preparation of this article, we accept no liability for any direct or indirect loss or damage as a result of reliance upon this article. Always consult an expert before making investment decisions or property purchasing decisions.