How does equity work?

[petho]

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.

 

[Aimjoy]

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

 

[wanelad]

Be sure to structure the loan properly for tax purposes and future borrowings