Whether it’s the primary reason or not, many people take the opportunity to set aside some equity to be available for investing when they refinance their home. Refinancing your home loan can open the door to new investment opportunities
Investment gearing has been a successful strategy for many property investors. Gearing involves the use of borrowed money to invest. In this case we are talking about borrowing against the equity in your home when you refinance in order to invest in a property.
When it comes to setting up an investment strategy it is important to get professional advice from a financial advisor. Although gearing can help improve your investment return, it could also cost you greatly if it is not managed correctly. A financial adviser will be able to look at your personal circumstances to see which strategy will be best for you.
The graph above is an illustration of an investment which produces a steady income stream of 3% of the investment’s value each year. In addition, at the end of every year it has grown 5% in value. The loan interest rate is 6% pa. The investor’s marginal rate is 3.5%, and the results shown are after tax with only a portion of the investment sold at the end – just enough to repay the loan and the resulting capital gains tax.
The ungeared investment involves simply putting $250 per month into the investment, starting with nothing. For the geared investment, $100,000 is borrowed from the equity in the home at the time of refinance. Between the 3% income generated by the investment and $250 per month contributed by the investor, there is enough to cover the interest payments with any surplus being added to the investment itself. In both cases, tax is paid each year out of the investment value.
As shown in this illustration, gearing being included with the home refinance has enabled the investor to nearly double the value of the investment in the ten years as compared to not borrowing to invest.
This example is to show how gearing can help improve your investment return and you may not necessarily receive the same return as described in this illustration. That is why it is important for you to speak with a financial professional to ensure you have a good understanding of the risks involved and whether it is the right option for you.
State Custodians Home Loans for Home Refinance
One of the most common loans used to refinance an existing loan is the Standard Variable Offset Home Loan. It has very attractive interest rates and award winning features. Click on the link for details. Should you have a smaller loan, a Breathe Easy Offset Home Loan might be best for you. It has no upfront or ongoing regular fees, but a slightly higher interest rate. Both have the same features when it comes to function. Give us a call and we will help you work out which is best in your situation.