Equity is the difference between the value of your home or investment, and the amount you still owe the bank. To put it simply... how much of the property you own - not the bank!
How do I use it to invest?
You can access ‘some’ of your equity for investment purposes or even to buy a new car. However, you need to remember that the bank always wants to have a margin between the loan and the value of your house. This margin protects them against property price fluctuations in the event of foreclosure. As a result, you can only use the equity left available after the margin. The good news is that if you have sufficient equity, you can fund the deposit and costs on an investment property. This is the most common method of investing; ‘access equity’. If you’re in a good financial position and have accrued some equity in your property, then investing can become quite accessible for you.
How can I figure out how much equity I have to use?
A simple calculation on how much equity you could use without attracting big fat fees such as lenders mortgage insurance, is to take your estimated value of your property, multiply it by 80% (or 0.80 on a calculator), and then deduct how much you have left on your mortgage balance. If the figure is positive you could be using that equity without fees to perhaps leap-frog another property. Now remember, just because you have equity doesn't mean you should borrow it for other purposes - that would make you an equity eater and to build wealth we must genereally build equity, not eat it. You can leverage equity at more then 80%, but beware, as your investment strategy will attract lenders mortgage insurance fees, and expose you to more risk with property price fluctuations.
How does investing in property work?
With the tax benefits of depreciation, and negative gearing, you can invest in property without a massive drain on your weekly finances. You can even claim the tax savings from property as you go through your pay. This is how regular people on regular wages buy and invest in property to grow wealth.