Beware of fall­ing into equity traps

Bor­row­ing against your home to fund in­vest­ments needs care­ful con­sid­er­a­tion, Ben Hyde re­ports.

The Advertiser - Real Estate - - House Hunter -

US­ING equity in prop­erty to buy in­vest­ments can be a ticket to life­long wealth but ex­perts say you need to be wary of the traps. In the best-case sce­nario, lever­ag­ing off prop­erty can help build a sub­stan­tial in­vest­ment port­fo­lio.

On the other hand, it also could leave you with­out a house at all.

Prop­erty lec­turer, in­vestor and au­thor Peter Kouli­zos says in­vestors should err on the side of cau­tion to avoid risk­ing los­ing the fam­ily home.

‘‘If you use too much equity on your own home, you leave your­self in a dan­ger­ous po­si­tion. Let’s say you bor­row 97 per cent of the value of the prop­erty – hard to do now but you could five years ago – and the value falls 5 per cent. You then own less than what you owe,’’ he says.

‘‘The best way to mit­i­gate the risk is to not use too much equity.’’

Mr Kouli­zos says in­vestors should avoid dig­ging into their equity to fi­nance a de­pre­ci­at­ing as­set.

‘‘Us­ing equity in your home to go on an over­seas hol­i­day or to buy a new car is how you get into dif­fi­cult a po­si­tion,’’ he says.

‘‘The hol­i­day is not worth any­thing ex­cept mem­o­ries and a one-year-old car or boat is worth less than when you paid for it.

‘‘But us­ing the equity in your home to buy ap­pre­ci­at­ing as­sets, like other prop­er­ties, is very smart.’’

To min­imise the risks, Mr Kouli­zos rec­om­mends those us­ing equity to buy an in­vest­ment prop­erty to keep some cash on hand.

‘‘Then you can sleep well at night know­ing if your prop­erty is va­cant for a month, or if it needs ren­o­va­tions, you can cover it,’’ he says. BankSA gen­eral man­ager Chris Ward says there are sev­eral el­e­ments to con­sider be­fore us­ing equity in your home for in­vest­ment.

‘‘It’s im­por­tant to make sure the level of gear­ing is con­ser­va­tive and that you build in a buf­fer in your cal­cu­la­tions to en­sure your in­vest­ment strat­egy is ro­bust enough to ride through fluc­tu­a­tions,’’ he says.

Mr Ward says it is im­por­tant to en­sure life in­surance is up to date and that any hold­ing costs are fac­tored into the house­hold bud­get.

Po­lice Credit Union ex­ec­u­tive man­ager of prod­uct and mar­ket­ing Paul Mo­dra says par­ents also need to be wary of us­ing equity in their home as a guar­an­tee for their chil­dren’s prop­erty pur­chases.

‘‘The ma­jor risks in­volved with go­ing guar­an­tor for some­one else’s loan is po­ten­tially los­ing your own prop­erty if the other per­son de­faults on the loan,’’ he says.

‘‘Guar­an­tors can risk be­ing fi­nan­cially out of pocket to pro­tect their prop­erty by be­ing forced to make the other per­son’s re­pay­ments to stave off sur­ren­der­ing their as­set.

‘‘Limit the risk by only al­low­ing a per­cent­age of your house as col­lat­eral, maybe a max­i­mum 20 per cent of the funds re­quired for the loan.’’

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