Weaker house price growth, rising interest rates and tax rate changes make borrowing against your home equity not as attractive as it was five years ago. However, it can still be a powerful wealth-building tool.
Thanks to the housing marketboom early this decade, many house prices in SAhave more than doubled in value. According to the Real Estate Institute of Australia, SA's median house price is $286,500 - compared with $130,500 in 2000. "Household wealth is now at unprecedented highs," BankSA general manager Chris Ward said. "Taking advantage of this equity to invest is an increasingly popular way of boosting retirement income by lifting the value of investments," he said. Mr Ward said before borrowing against their home people should "start with the basics". "Consolidate or pay off existing debt from store cards and credit cards with high interest rates, ensure you have insurance in place to protect yourself and your potential to earn income, and make sure your will is up to date," he said. Financial strategist Theo Marinis of Marinis Financial Group said people using equity in their home to invest needed to take a long-term view. "You have to give yourself a reasonable time-frame. The minimum period for growth investments - whether propertyor shares - is five to seven years because they are volatile," Mr Marinis said. He said a benefit of borrowing to invest - also called gearing - was that you increased the size of assets working for you and received a tax deduction on interest and other costs related to the investment. "But for gearing to work you have got to have reasonable capital gains," he said. "If you bought five properties seven years ago you would be laughing now, but I would be very wary about doing it over the next seven years." Cuts to marginal tax rates in recent years have changed the dynamics of borrowing to invest by making it less attractive for people on lower and middle incomes. For example, someone earning $65,000 per annum six years ago was on the top marginal tax rate and would have been refunded 48.5c of every dollar they spent on their investment loan interest. Today they receive just 31.5c because they are in a lower tax bracket. Borrowers are also battling higher interest rates, and for investment properties yields are much lower than they were five years ago - meaning you have to find more of your own cash to pay your interest. But gains can still be made. Had you borrowed $50,000 and invested it across the Australian share market four years ago it would now be worth more than $100,000. Ord Minnett financial adviser Tony Catt said investors should not negatively gear just "for the sake of negative gearing". "From a cash flow perspective you need to be conscious that you are losing money. The assets you buy need to improve quite considerably in value for you to move forward," he said. ``If you take on additional risk in your portfolio you need to make sure you are getting extraordinary returns, not just run of the mill investments. You need to make sure you are investing in growth assets, not balanced funds where 50 per cent of that invests back into cash and fixed interest.'' Property and shares have grown strongly over the past 20 years, and would have delivered great returns for anyone who borrowed to invest. But past performance does not tell us what the future holds. "People need to be conscious of worst-case scenarios," Mr Catt said. "What if the rent stops? What if the dividends stop? You need to be conscious that cash flow from your normal income can support your loan in worst case scenarios." Home Equity Tips Establish the value of your loan to determine how much equity you have. Seek professional financial advice Investigate all options - property, shares and managed funds - as they have varying benefits, tax advantages and levels or risk. Look at diversifying your portfolio to limit any risk. Talk to your financial institution to identify the best option from a fast-growing range of products.
Source: BankSA & realestate.com.au | 
