Building a property portfolio remains a popular wealth creation strategy in the new decade, with one in seven taxpayers owning at least one investment property, according to the most recent taxation statistics.
Yet, many `mum and dad' potential investors question whether they can afford to purchase an additional property while continuing to repay their home loan. Using equity may provide a solution.
Often, people who have paid off all or part of their home borrow against the equity they have built up over time - the difference between a home's market value and the unpaid balance of the home loan - to finance the deposit for an investment property purchase.
Spokesperson for mortgage broker Mortgage Choice, Kristy Sheppard said recently that the firm's latest property investor survey found 60 per cent of those looking to buy an investment property before mid 2011 planned to access equity in their home to fund all or part of that purchase.
"There tends to be an `old school' notion that repaying a home loan in full is a must-do before purchasing more properties", Ms Sheppard observed.
"A family home is the biggest financial commitment, and asset, many Australians will ever have. So why not put it to work while you work on paying it off?"
"Of course, how much you can borrow is subject to lenders' serviceability criteria as well as the amount of available equity, which works as security for the investment loan", Ms Sheppard said.
In effect, this means you don't have to come up with a cash deposit.
"It is important to note this strategy does require borrowers to take on a certain amount of risk", Ms Sheppard warned.
"Before accessing your equity it is necessary to establish whether you can comfortably afford higher loan repayments and which, if any, lender is willing to lend to you.
"So, it's clever to consult a financial and tax adviser then visit a reputable mortgage broker, who can help you compare finance options and find a lender and loan product suited to your circumstances."
Mortgage Choice identifies three common types of equity finance available:
1. Loan top-up - allows a borrower to increase their home loan amount in order to help fund another property purchase. Extra funds are usually made available via a lump sum payment with interest payable on the entire top-up amount.
2. Line of Credit - allows a borrower to withdraw funds in addition to their home loan amount, up to a limit set by their lender. Interest is also payable on these funds. Line of credit loans generally attract a higher interest rate, are often interest-only and must be carefully managed.
3. Refinancing - allows a borrower to move to a different lender and loan product in order to increase their home loan amount. It's important to shop around as lenders offer different features, fees, interest rates and measure borrowing capacity differently.