Introduction
The equity of your home is not just a valuable asset, it is also a powerful one. The question is, how do you use it? In this article we’ll explore a few ways you can make your home equity work for you.
What is Equity?
In simple terms, equity refers to how much of your home that you own. It’s the difference between the current value of your property against the debt you owe.
If your property is valued at £500,000 whereas your loan is valued at £300,000, then your equity stands at £200,000. Paying down your mortgage and your property’s value appreciating, increases your equity.
How to make the most of your Home Equity
In many cases your home equity acts as an asset to be used for other financial pursuits; be it portfolio expansion, or long-term capital appreciation.
The most common pursuit of equity utilisation is Buy-to-Let (BTL). In this case, an individual may remortgage their current property onto a specific BTL mortgage, releasing equity from the property in order to allow for the purchasing of a new one. What is gained from the rental income is then used to pay the first mortgage of the rental property.
To understand more about BTL see our previous post about the UK’s current BTL market.
Other products include the home equity line of credit (HELOC). In simple terms, a HELOC can be imagined as a credit card with the equity of your home being used as collateral, and is therefore still a loan. Your equity acts as the security.
Alternatively, equity can also be used for investments that are separate from property entirely including bonds or managed funds.
Risks of Home Equity Investments
All the above come with a plethora of risks, and it’s equally important we understand what those are.
Using your home equity to invest in the stock market comes with accepting the turbulence and volatility of the stock market, and whilst it may appear attractive it is a risky endeavour. Additionally, if HELOCs have a variable interest rate you aren’t protected from future hikes even if you took out the loans when interest rates were low.
Before anything, it is important that you take several steps to understand your position:
1. Assess and calculate your current home equity.
2. If necessary, seek expert advice by consulting a mortgage advisor on how to best leverage your equity.
3. Investigate.
There are many smart investment strategies that can be used for equity, particularly within the realm of using it to purchase another property. It is also paramount that you understand the risks involved and always seek professional and expert advice in this regard.
Inceo Capital is not authorised by the Financial Conduct Authority, and does not provide advice on regulated mortgage or consumer credit products. All services relate to non-regulated business and investment finance, including bridging loans, buy-to-let-finance and commercial funding.
