Investors Ask: Equity investing
Q. My partner and I have paid off our family home and would like to purchase an investment property? Is it a wise idea to borrow on the family home or should we save a deposit and start from scratch?
A: First off congratulations on paying off your home loan! You’re now living debt and rent free and there are millions of Australians who would love to be in your shoes. Most property owners only realise the wealth they’ve accumulated in their homes when it comes time to sell - for instance when they move, retire, upsize or downsize.
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But you don’t have to wait to sell your home to make the most of its untapped increase in value. In your case, with no home loan debt (and I’m presuming no other major debts) to worry about, you’re in a great position to use your home as security to invest in wealth creation.
However, if you’re going to put probably your most valuable asset at risk (one that is valuable both finically and emotionally) you must be absolutely certain this is something you want to do, that you understand the risks and rewards of property investment and that you can absorb any potential financial problems if your investment goes pear shaped. The last thing you want to do is sell your home to repay your investment borrowings.
Saving a deposit takes time and by the time you’ve reached your savings goal the market could have increased considerably meaning you’ll not only have to save a larger deposit (because prices have gone up) but you’d also have foregone the benefits of capital growth in the meantime. By accessing the ‘savings’ you have in your home you can become a landlord sooner. If you’re worried about using your home as security aim to pay off your investment loan as soon as possible so that only your investment property is needed as security.
Peter Boehm, columnist, Yahoo!7
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