Equity Release How Does It Work

The majority (but not all!) of our clients are Australian, so we often talk to clients who have been fortunate enough to own homes in Australia for the last 5-10 years and have built up a great deal of equity while paying off their mortgages.

Due to property ownership and the rising property prices over the last decade, Australians are, as a nation, some of the wealthiest individuals in the world with the average wealth per adult at $496,819.

However if you ask the everyday Australian homeowner, most would say they don’t feel wealthy. This sentiment is due to rising costs of living and inflation. Last year, the ABS reported a 9.0% annual rise in living costs for employee households. Most of that increase was due to housing costs, with mortgage interest rates nearly doubling, up 91.6% over the year before.

Read more in our News page: Australian Property Investors are ‘Copping It’

Australians are sitting on untapped mines of equity and wealth in their homes, but they haven’t been utilising it to maximise their cash flow. When done well, equity release can help in the short term to offset rising costs, as well as become a valuable tool in a solid wealth creation strategy.

Equity Release in Australia: Building, Calculating, and Leveraging Home Equity

Equity in a home is the difference between the market value of the property and any outstanding mortgage or loan balances against it. Homeowners build equity in two primary ways:

– Mortgage Repayments: With each mortgage payment, a portion goes towards reducing the principal amount of the loan. As this principal decreases, the homeowner’s equity in the property increases.

– Property Value Appreciation: Over time, real estate typically appreciates in value, especially in Australia. This increase in market value boosts the homeowner’s equity, independent of mortgage repayments.

How Do You Calculate Equity in a House Australia?

To calculate equity, subtract the remaining mortgage balance from the current market value of the property. For example, if your home is worth $800,000 and you owe $300,000 on your mortgage, your equity is $500,000. It’s essential to get an accurate and current property valuation for this calculation, as market values can fluctuate. Speak to a qualified mortgage broker, such as partners at Financebetter who can evaluate your equity position and how much you can safely release.

Reasons for Releasing Equity

Equity release refers to accessing the built-up equity in your home without selling it. There are several reasons why homeowners opt for equity release:

– Home Improvements and Renovations. Many homeowners release equity to fund renovations, which can further increase the property’s value and enhance their living space.

– Debt Consolidation. Equity release can be used to consolidate debts, such as credit card debts or personal loans, often at a lower interest rate, simplifying finances and reducing overall debt burdens.

– Funding Major Expenses. Significant life expenses like education fees or a child’s wedding can be funded through equity release, providing a lump sum of money when needed.

– Investment Opportunities. Some homeowners use equity release to invest in additional properties or other investment opportunities, aiming to grow their wealth.

– Retirement Planning. For retirees, equity release can supplement pension income or fund retirement lifestyles, especially when other savings are limited.

– Emergency Funds. Accessing equity can provide a financial safety net in emergencies, such as unforeseen medical expenses or job loss.

For more advice from our mortgage brokers at Financebetter, you can go to this link to watch our podcast: “If you’ve got equity, utilise it.” | An Interview with Financebetter

Releasing Equity to Buy Another Property

Equity release has become a popular strategy for property investors seeking to maximise their assets and secure financial growth.

Equity release in property investment involves unlocking the value of a property without having to sell the property itself. Investors often use this strategy to free up capital from one property to fund the purchase or improvement of another, leveraging their existing assets to expand their investment portfolio.

“We are working with clients every day who are simply sitting on equity in their homes,” says GPFG International Sales Manager Mark Reed. “The question is, though, how is that equity helping you now? Is it helping you pay your bills, or pay off debts? We show clients how they can use existing equity as a tool for wealth creation.”

Read more: Unlock Your Equity and Earn Cold Hard Cash

How Does Equity Release Work for Property Investment?

Equity release typically involves borrowing against the value of your current property. This can be achieved through a home equity loan, a line of credit, or a mortgage refinance, where you borrow more than you owe and pocket the difference. The amount you can borrow depends on the property’s value and the equity you have in it.

Utilising equity release as a cornerstone of wealth generation is highly advantageous for homeowners who have accrued significant equity in their properties. This method allows them to tap into their home’s financial value, employing it to strengthen or diversify their investment portfolios and enhance their overall financial health.

The primary advantages include:

– Unlocking Cash for Investment. Release the wealth tied up in your primary home without selling. Transform your home equity into accessible funds for investment purposes, such as deposits or generating rental income.

– Risk Diversification through Portfolio Expansion. Utilise the freed-up equity to invest in a variety of property types. This not only spreads your investment risk but also enriches your portfolio by adding diverse assets.

– Creating New Income Sources. The equity you release can be utilised to purchase a second property for rental purposes, thereby establishing a consistent revenue stream. This can supplement other income sources, thanks to potential rental yields.

– Capital Growth through Property Appreciation. Utilise the equity from your primary residence to invest in additional properties, potentially in high-growth markets. This strategy can lead to long-term capital gains as the value of these properties increases.

– Enhanced Investment Opportunities. Leverage the equity of your existing property to broaden your investment scope, amplifying your investment capabilities without the need for extra cash inputs.

– Securing a Comfortable Retirement. Equity release can bolster your retirement plans. Invest in properties now to supplement your retirement funds with income generated from these investments, paving the way for a financially secure retirement.

Tax Advantages. Property investments come with numerous tax benefits and deductions. By unlocking equity for property investment, you can work with a tax advisor to maximise deductions on expenses like depreciation, insurance, and management fees.

– Flexibility and Personal Control. Choose the type and location of your investment properties. With GPFG, you also have the flexibility of fractional property investment. While our team of seasoned advisors is here to guide you, the ultimate control over your investment choices and strategies remains in your hands.

“We have a variety of ways to help clients turn their equity into cash,” says Mark. “First off, we have fractional investments, so you can invest as little as you want and still earn returns. Second, there is interest paid during construction, so you are earning 8% immediately. But lastly, we have developments that are operational this year, so you can start earning high returns in just a few months time.”

Read more on our News page: Equity Release Done Right

Equity Release to Buy Investment Property

Equity release for property investment offers a dynamic and multifaceted approach to wealth creation, providing homeowners with a powerful tool to enhance their financial stability and future prospects, and bolster their overall financial situation.

GPFG clients are leveraging their equity to invest in properties, including fractional investments, that offer cash-flow positivity, yielding favourable returns and generating passive income. This strategy is particularly attractive for clients aiming to broaden or diversify their investment portfolios while also pursuing new avenues for income generation.

Contact our team to learn more today!

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