The last 6 to 12 months has seen solid growth in the property market, with Sydney and Melbourne experiencing over 10% growth in some areas. But now that the gains have been made, is it time to sell and take the profits or are there other ways to use the newly acquired equity with greater purpose?
While most people understand that profits are earned when you sell, it can also attract some negative elements such as capital gains tax, sales agents fees and the lack of any future gains that the property may make moving forward. After all, no one has a crystal ball and you may end up selling before the market has peaked.
Unlike other investments like shares or a business, additional increases in your property value can be accessed without necessarily having to sell the property. As long as you have approval from your lender, the most popular way is to refinance against the improved value of the property and release equity.
Equity is essentially the amount you would have left over once your loan is repaid. For example, if you were to purchase a property with a 10% deposit, your equity in the property would be 10%. This is the amount that belongs to you. More importantly, if your property were to increase in value by another 10%, your equity in the property would now increase to 20%.
Refinancing your loan with a new lender at the improved amount let’s you release this equity, normally into your offset account or as a Line of Credit. Once this facility is established, you can effectively borrow the majority of the profit at an agreed rate from your lender, without ever having to sell your property or incur any of the costs that might normally come along with it.
While the GFC saw most of us recalibrate our view on debt, the truth is that most investors will grow their portfolios by borrowing against this newfound equity in their existing properties.
So assuming that you’re comfortable using debt, and you’re approved by your lender to borrow further, how can this equity be used to fund your next property purchase?
Put simply, you use your newfound equity to pay for both the deposit and the additional costs that come with buying a new property. Traditionally this deposit was created by first home-buyers using their hard-earned savings. This can be quite time-consuming though and can really impact on your quality of life. But by saving to buy the first property, watching it grow in value and then leveraging off the improved value, you can acquire more and more property without the financial hardship.
So the next time you’re wondering how some people build large portfolios of property, it’s not because they’re good savers! These people have bought well priced, well positioned properties, watched them grow over time and have used the equity to pay for the next one without having to lift a finger.