How does equity work?

Discussion in 'Property Investment - Other' started by petho, 8th Jun, 2007.

  1. petho

    petho Member

    Joined:
    5th Jun, 2007
    Messages:
    14
    Location:
    Adelaide, South Australia
    Probably a simple question about how equity works:

    Lets say:
    I have $250k equity in my current home.
    I purchase an investment property for $230k using $50k equity from my home.
    Does that mean that I have “borrowed” another $50k; hence, I will need to make additional mortgage repayments? In other words, if I use the equity in my home, don’t I have to pay that back somehow?

    Cheers.
     
  2. Aimjoy

    Aimjoy Member

    Joined:
    10th Nov, 2004
    Messages:
    826
    Location:
    Central Coast, NSW
    Dear petho,

    Does that mean that I have “borrowed” another $50k; YES


    hence, I will need to make additional mortgage repayments? YES

    In other words, if I use the equity in my home, don’t I have to pay that back somehow? NOT NECESSARILY

    A strategy many people adopt is that they just SERVICE the debt - i.e. pay Interest Only (IO) on the loans for IPs as that is the only part that is tax deductable anyway. So IO on the $50K borrowed against your PPOR and the loan on your IP.
    Also if res housing doubles every 7 - 12 years then the debt portion (which is NEVER repaid) becomes a smaller and smaller component of the Asset (in this case IP).

    Cheers,
    Aimy
     
  3. wanelad

    wanelad Member

    Joined:
    5th Dec, 2006
    Messages:
    101
    Location:
    brisbane Qld
    Be sure to structure the loan properly for tax purposes and future borrowings