Using the equity in your home
There can be a range of benefits and risks in releasing the equity in your home and using it for investment. You could:
- have an opportunity to build wealth more quickly
- benefit from different types of gearing
- pay off your home loan sooner using debt recycling, provided you can manage the risks involved
- risk losing your entire property if you can’t meet loan repayments.
Borrowing against the value of your home—which is how you access your equity—may enable you to buy an investment sooner than if you had to save the money. Owning additional assets can help you build wealth more quickly, although investing usually involves risks.
In addition to your investment potentially increasing in value over time, any expenses related to owning the investment, including loan interest charges, are generally tax deductible.
A negatively geared investment can provide tax benefits while a positively geared investment effectively pays for itself and may generate income—although extra income usually means you’ll pay more tax.
What’s more, owning an investment gives you the opportunity to generate an extra source of income down the track. And a strategy like debt recycling can help you pay off your home loan sooner, using the income from your investments.
Of course, you need to consider the risks involved first. For example, it’s important to understand that when you borrow against the equity in your property your overall level of debt increases. That means you’d have more financial responsibility and may also risk losing your property if you were unable to meet loan repayments.
If you’re thinking about using your equity to invest, AMP’s Equity calculator can help estimate the value of the equity you may have access to.
What does gearing mean?
The term gearing simply means borrowing money to invest. An investment can be negatively, neutrally or positively geared—depending on the relationship between the costs of owning the investment and the income generated.
What is it?
The interest payments and other investment costs are higher than the income you receive from the investment.
When the interest payments and other investment costs are equal to the income you receive from the investment.
When the interest payments and other investment costs are lower than the income you receive from the investment.
How can it affect my tax obligations?
You can claim a tax deduction for the interest and investment costs, and reduce the overall tax you pay on your other income.
You can claim a tax deduction for the interest and investment costs against your investment income. You won’t be able to reduce the tax you pay on your other income.
You can claim a tax deduction for the interest and investment costs against your investment income. Your income will be subject to tax, but you can use the surplus income to reduce your loan.
(i) This is our general understanding of current legislation and rules as they apply to individual taxpayers. Taxation laws and their interpretation may change from time to time. We recommend that you consult your tax adviser for advice on your personal situation and before implementing a gearing strategy.
What is debt recycling?
Your family home loan is not the most efficient type of debt. It doesn’t generate an income and the interest repayments are not tax deductible.
But there may be a way to recycle the non-deductible or ‘inefficient’ debt from your family home loan into more efficient, tax-deductible debt. You can even use any earnings from this ‘debt recycling’ strategy to pay off the inefficient debt on your family home loan.
Debt recycling can potentially help you build your long-term wealth. But it’s a high-risk strategy, because you’re using your home to invest. And if your investment performs poorly or interest rates increase, you could face significant financial stress or even put your family home at risk. You need to consider whether this will be suitable for your particular circumstances.
Here’s how debt recycling works.
- Use equity in your property as security for an investment-purpose loan—this means your home will be used as security and may be put at risk.
- Use the borrowed money to invest in an income-producing asset, such as a managed fund, an investment property or shares.
- Use the income generated, plus any tax advantages of a geared investment, to pay off non-deductible debt in your home loan.
- Increase your investment-purpose loan by the same amount that you have paid off your non-deductible loan, and reinvest that increased amount.
- Repeat this process each year until your deductible loan entirely replaces your non-deductible loan.
It isn’t suitable for everyone. You need to be comfortable with using the equity in your home to invest. And it’s important to seek financial advice.
For a debt recycling strategy to work you need:
- a regular, independent income you can rely on to deliver a surplus cash flow to cover the interest payments on your investment loan
- a long-term investment focus
- a willingness to increase your debt and hold an investment loan
- tolerance for risk and short-term fluctuations in investment value.
It’s also important to think about income protection insurance, which may provide replacement income in case you’re sick or injured and unable to work.
Paying off property sooner
Understanding exactly what you’re paying and when you’re paying it is the first step to taking control of your home loan. Once you know the ins and outs of your home loan, you can start looking at ways to pay off your property sooner. You could:
- increase your repayments
- make more frequent repayments
- take advantage of low interest rates
- link to an offset account
- consolidate your debt.
Important informationShow more
It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.
This information is provided by AMP Life Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.