Tapping into the equity in your home . . .
Using the equity your own home to finance another purchase is not always the ideal solution, but for many people it’s the easiest choice.For some, it’s the only choice.
For some people, it’s a choice so scary that it’s strictly off the table not even an option. That’s a shame, because the equity in one’s own home should be no more scary than borrowing from a bank.
To help our clients get through the emotional block of refinancing their own home, we teach them the ‘Principle of the 5-Year Loan’. The principle is simply when you borrow from your home you should act as if you are taking it for a period of five years, effectively borrowing it from yourself with a fixed repayment date.
It’s like borrowing from any normal bank, except now that bank is you, and the rates and returns will be much more favourable.
This specific principle was the reason Phillipa allowed Murray to borrow money from their home. She could see a definite end date and was going to stick to it. Phillipa had everything bar a contract drawn up between the two of them. It was a great process to see.
Five years down the track Phillipa is perhaps not surprisingly a different person. Her emotions surrounding finance, and her investment education, are much more developed, and she sees no sense in paying the loan back. She is far too focused on the next step in building their property portfolio using our strategies.
So how does this principle work?
Assume that your home is worth £200,000 and your current mortgage is £50,000. We could borrow up to 90%, or £180,000, giving you £130,000 equity to spend.
You probably don’t need to borrow that much, so let’s say that you borrow an extra £50,000 through a remortgage. This gives you £44,000 to spend on your portfolio.
But why not the whole of the £50,000?
We teach our clients first to put aside all the payments for the increased mortgage for two years. In other words, before spending anything, you work out what the repayments will be on that £50,000 over two years based on a 6% interest rate (or Mortgage Cost Average rate – see our investment blog here). If you are in Australia then you’ll need to calculate your MCA rate at 8% as this is the long term average I use.
Why do we put aside the two-year provision? It comes down to emotions. I find that, especially when starting out as a property investor, putting this money aside allows you to rest easy, knowing that, whatever happens, you have the money to pay the increased mortgage.
So, £50,000 x 6% x 2 years is £6,000. This £6,000 you then set aside either in the flexible account or into a separate provision account, ready to be paid out each month. So you are left with £44,000, ready for use in buying and holding property.
If you want to have the team, explain in detail how you can use the Principle of the 5 Year Loan to you give them a call on +44 (0)207 923 6100 or direct on their mobiles.
Live with passion,