Many Aussie homeowners would be sitting on substantial equity after the housing market boom over the last two years. Even though the housing value growth is starting to ease due to softening market conditions, assessing how much useable equity you have and how you could potentially use it to fund an investment property is worthwhile. In this blog, we will explain the term lazy equity to help you understand how you can make it work for you.
What is equity?
When it comes to property, equity is the difference between the current value of your home and how much you owe on it. For example, if your home is worth $850,000 and you owe your bank or lender $400,000, your equity is $450,000. But you won’t be able to borrow against your total equity amount, as banks or lenders commonly let you borrow 80% of the value of your home.
We can use the example above to calculate the useable equity figure: $680,000 (80% of home’s value) minus $400,000 (mortgage) equals $280,000 (useable equity). Get professional advice on how much useable equity you can borrow against, and always allow a buffer to protect yourself and allow for purchase costs and unexpected expenses.
What is lazy equity?
Lazy equity is accumulated equity from your home or property portfolio that is not utilised for its best use, like investing in another appreciating asset.
So using the example above, if your useable equity is $280,000 and you are not using it to generate a return in some way, that would be considered lazy equity.
How can you use lazy equity to invest in property?
If you are sitting on lazy equity, you can withdraw some of this and use it as a deposit to buy an investment property. A ‘line of credit loan’ allows you to borrow against the equity in your existing home, and you only pay interest on the amount you’ve drawn.
An investment property can generate income to cover most holding costs whilst growing in value over time and building equity. Paying down debt and capital growth will increase your equity, but if the market is not creating further equity gains, paying down debt will. Then you can build a property portfolio over time as your equity compounds.
Get qualified financial advice
Before making any important financial decisions, we strongly advise you to consult your bank/lender, a mortgage broker, financial advisor or accountant to choose the right loan for your circumstance and confirm your ability to purchase and hold an investment property.
If you don’t already have established relationships with these providers, we have an A-grade team of professionals that we would be delighted to put you in touch with. We align ourselves with only the best providers who have been tried and tested to ensure your investment journey is memorable and hassle-free.