How to invest in property using a line of credit or home equity loan

Equity is the difference between the current value of your property and the amount you owe on it. For instance, if your home is worth £300,000 and you owe £200,000 on your mortgage, you have £100,000 in equity.

You build equity in your home in two ways: through making your regular mortgage repayments and through the increase in the value of your property over time. If you’ve been paying your mortgage for a number of years, you will have reduced the principal, or initial amount you borrowed. At the same time, your home may have increased in value. The combination of the increase in value and the reduction in principal adds up to equity. This is known as price appreciation.

A line of credit loan only requires you to pay the interest portion of the loan until you reach your credit limit. This can be a savvy move for property investors, as interest repayments on investment properties are tax deductible.

First, using a line of credit loan to invest in property could potentially see you managing three mortgages. Between your owner-occupier mortgage, the line of credit and an investment loan, using a line of credit for property investment can be cumbersome.

Another drawback of line of credit loans is that you’re using your own home as security. This means that if you run into trouble repaying your line of credit when it’s due, your lender could seek recourse through your property and, in the worst case scenario, could even repossess your home.

• Try to avoid using your entire credit limit. Leave yourself a buffer so you don’t have to make principal and interest repayments on the line of credit.
• Leaving a buffer also allows you to use your line of credit for repairs and maintenance.
• Devote extra funds to repaying your owner-occupier mortgage. This unlocks more equity and minimises your non-tax deductible debt.

Line of credit loans come with higher interest rates than typical mortgages, and rates can vary substantially from one lender to the next. It’s important to compare to make sure you’re getting the best deal available.

If you’ve been diligent in repaying your mortgage, and if you’ve been lucky enough to see your home grow in value, a line of credit loan could offer a great way to put your equity to work for you. But, as with all financial products, it’s important to compare your options and consider your own financial situation before you make a decision.