What is an Equity Loan?
Essentially an Equity Loan is set up as a line of credit so that the owners of property can withdraw funds up to a set limit at any time without the constant application for further loans.
This can work well for investors who prefer to buy and sell properties rather than buy and hold properties. In saying that, it can also work well for those who want to buy and sell.
Buy and sell
Assuming there is sufficient equity an investor who wants to buy, renovate and sell a property can do this without constantly seeking funds from the bank. Because of this system of using borrowed funds, the property owner is not constantly up for bank fees every time monies are spent on properties. The arrangement could well be in place for several years, with several properties changing hands during that time.
Buy and hold
For an investor who wishes to buy and hold property, an Equity Loan can still be suitable because as the equity increases in the held properties the limit can be increased and this will allow for upgrading or the properties if required.
Property investors
This means of lending can be very good because it does give some flexibility throughout the year as regards spending and recouping of funds.
Caution
What has to be taken into account though, is that running the account to a full limit will wipe out the benefit of having such a loan as it will mean that maximum interest is being paid on the full balance while it is at that level.
An Equity Loan is designed to go up and down as income is put into the account and as expenses are taken out of it. The purpose is to only pay interest on the monies that is needed to be used to operate the account (business of investing).
The amount that can be loaned is subject to the amount of equity that is built up in the property that is owned. As per other loans, serviceability, other borrowings, assets and income potential all play a part in the final loan available.
Filed Under: Property Investment Tips
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