Home Equity: A Flexible Source Of Funds

The Age

Monday September 4, 2000

THE need to plan for a smaller aged pension means many people are looking for new ways of assuring their financial future.

A line of credit, based on the equity in your home, can be one cost-effective way to create wealth.

Peter James, managing director of RESI Home Loans, says: ``Every home-owner can have access to a line of credit to increase their borrowing potential to fund investments. This loan can be used to fund major purchases or investments and will incur no costs while the facility is unused.

``Not subject to any annual review, a line of credit can be a reliable source of funds, which can be beneficial when a quick response for investment opportunities is needed."

Mr James says the line of credit provides a flexible means of funding investments at more competitive interest rates than personal loans.

``This can provide dual benefits: savings incurred in the difference between the interest rates and a greater earning ability of the investments," he says.

``For example, a couple with total household earnings of $85,000 before tax are paying off a mortgage on a $300,000 property. Equity is the amount that the lender will lend, currently 80 per cent of the value of the home, less the amount owing on the mortgage.

``In this case the $300,000 home has an outstanding loan of $200,000. A lending rate of 80 per cent of $300,000 is $240,000, less the $200,000 owed, providing for $40,000 equity in the home.

``Establishing a line of credit for the equity will give this couple the use of $40,000 to diversify their investment portfolio and help them achieve greater financial wealth for their future.

``When considering returns on investment (in property, shares, etc) and assuming the investment return is greater than the interest paid on the line of credit, this couple are on the way to wealth creation."

© 2000 The Age

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