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So you've bought your first home. What next? For many people, having a family property they can reside in for the long-term is enough for peace of mind. However, for a growing number of New Zealanders, this is just the first step on a much bigger journey: property investment.
One of the most reliable ways to do this is by using equity in the home you already own. For the uninitiated, equity is essentially how much of a property you have paid off. If you buy a house worth $500,000 and take out a home loan for $350,000, then you've got $150,000 of equity in the real estate.
It's an incredibly useful tool for expanding beyond your first home, whether into a larger place for your family or for an investment property. But you have to be careful how you do it! Here are some tips for managing your equity efficiently.
While bank interest rates don't follow the Reserve Bank of New Zealand's (RBNZ) cash rate to the letter, it is a guiding post for where variable and fixed rates are set on home loans. Considering the RBNZ cut the cash rate to 2.5 per cent in December and we've seen mortgage rates dip on the whole, it means it's a good time to build equity.
Low interest rates indicate low mortgage repayments, but contributing more than you need to means you'll benefit in multiple ways. For one, you're paying off a home loan much more quickly (and thus paying less interest). On top of this, you're building more equity. Taking advantage of low rate environments can give you more power to leverage equity into a new piece of real estate.
This one's more for people who haven't yet bought their first home, but are looking at an investment strategy down the line. Buying property that is primed for capital growth can be a great way to increase your equity, as the value of a home increases beyond what you paid for it.
For example, QV data indicates that between December 2014 and 2015, the average residential property value in NZ went up by 14.2 per cent. That means greater value in your property, which can boost your equity. Of course, it isn't an exact science, but buying for capital growth can put you on the front foot for property investment.
If value growth in your property isn't particularly forthcoming, you can add value manually with some renovations. If you do these right and consider what is going to increase a property's value at minimum cost, you can build equity with ease.
It might be a bathroom or kitchen refit (always popular), adding a bedroom or simply stripping down and redoing the deck at the back of the house. You'll want to make sure you get professional advice before taking to the home with your tools though - there's always the risk of overcapitalisation.
Equity is an invaluable tool when you're looking at property investment. However, it's vital to remember that there is no such thing as a one size fits all solution. Every financial situation is a snowflake, and needs to be treated as such.
That means getting professional mortgage advice, planning everything out well in advance and making sure you aren't committing to projects that you can't finish. Whether you want to talk about a new home loan, how to build equity in your first home or what the next step towards property investment is, the team at Squirrel is here to help you out.
We can help. Have a chat to one of our advisers.