by Simon Tarrant – Private Client Adviser at Morgans Financial Limited
After several years of seeing their property values increase, many Australian homeowners are considering tapping into their home equity as a means of wealth creation. Using home equity to invest can be a powerful strategy, but it comes with a number of risks and should be carefully assessed based on an individual’s specific circumstances.
Understanding home equity as an investment tool
Home equity is the difference between your property’s market value and the outstanding balance on your mortgage. As property prices in Australia have surged over the years, many homeowners have built substantial equity. Accessing this equity through a loan allows you to leverage your existing asset to invest in shares, property, or other wealth–building opportunities.
The benefits of using home equity to invest
Access to low–cost borrowing
Home loans generally offer lower interest rates compared to other borrowing options, such as personal loans or credit cards. This can make borrowing against your home an attractive way to fund investments.
Potential for wealth accumulation
Investing in growth assets, such as shares or property, can generate long–term financial returns that may exceed the cost of borrowing.
Tax advantages through negative gearing
If you invest in an income producing asset and the income is less than your expenses (including loan interest), you may be able to claim the loss against your taxable income. This can assist in reducing your tax burden and improve cash flow.
Diversification of wealth
Using home equity to invest can help spread risk across different asset classes, rather than keeping all wealth tied up in a primary residence.
Opportunity to build passive income
Investing in assets that generate rental income or dividends can provide additional financial security and help support long–term financial goals, such as retirement planning.
Risks to consider
Increased debt levels
Using home equity to invest means taking on more debt, which increases financial commitments and repayment obligations.
Market volatility
Investments, whether in property or shares, are subject to fluctuations. A downturn in the market could reduce the value of your assets while you remain responsible for loan repayments.
Rising interest rates
If interest rates increase, the cost of servicing a home equity loan will rise, potentially straining household budgets.
Risk to your home
If investments perform poorly and you struggle to meet repayments, you risk losing your property as it serves as collateral for the loan.
Liquidity concerns
Property investments, in particular, are illiquid, meaning it may take time to sell and access funds if needed urgently.
Is home equity investment right for you?
The decision to leverage home equity for investment depends on your financial situation, risk tolerance, and long–term goals. Here are some key considerations:
Do you have a stable income?
Ensure you can service the additional loan even in tough economic conditions.
Have you factored in potential interest rate increases?
Consider how rate hikes could impact affordability.
Are you comfortable with investment risks?
Be prepared for market downturns and ensure diversification.
Have you sought professional advice?
A financial adviser can help tailor strategies to your personal circumstances.
Using home equity to invest can be a powerful tool for wealth creation, but it requires careful planning and risk management. While benefits such as tax advantages and portfolio diversification are appealing, it is essential to weigh them against the potential downsides, including increased debt and market risks. Seeking professional financial advice is crucial to ensure this strategy aligns with your financial goals and risk appetite.
Simon Tarrant (AR: 001270872) is a Private Client Adviser at Morgans Financial Limited (AFSL 235410 /ABN 49 010 669 726). Simon is passionate about creating quality financial strategies that are tailored and customised to a clients’ lifestyle, financial goals and risk profile. Disclaimer: While every care has been taken, Morgans Financial Limited makes no representations as to the accuracy or completeness of the contents. The information is of a general nature only and has been prepared without consideration of your individual objectives, financial situation or needs. Before making any decisions, you should consider the appropriateness for your personal investment objectives, financial situation or individual needs. We recommend you see a financial adviser, registered tax agent or legal adviser before making any decisions based on this information.