One Benefit Of Homeownership You May Not Have Known
You have just bought a house and there is a 30-year mortgage attached to it, but it’s all yours. The interesting part is, this could be the first step to owning your dream house.
The prospect might seem daunting but having a mortgage can also help you achieve your long term financial goals.
Many of us may own a property but did you know that you can achieve a lot more with the investment besides living in it?
Typical benefits of property ownership
The benefits of owning property are generally well known. You have an asset that is almost guaranteed to appreciate in value and essentially increases your net worth without having to do any work.
It also allows you to take out bigger loans by putting the property up as collateral. This is a good way to raise money for other opportunities that you might want to explore.
If you do not plan on staying in the property, you can rent it out. Many property owners use this as a means of paying off the housing loan without impacting their own monthly expenditure.
Eventually, it just becomes some extra money that is invested in a solid asset. With the right property investments, the income generated by these assets can help you achieve your retirement goals earlier than expected.
What you didn’t know about home equity
“Home equity” is a phrase that occasionally gets thrown about but is often poorly understood. In a nutshell, equity is the amount of something that you own. In the case of home equity, this refers to the amount of ownership over a property in which you have legal interest (which is a way of saying how much you really own).
For example, you buy a house that costs RM400,000. Your bank loans you RM350,000 and you put a downpayment of RM50,000. In this case, your home equity is 12.5%, because you paid that portion of the whole price with your own money.
The bank doesn’t actually own the rest of the home. You legally own 100%, but since the property is usually used as collateral for the housing loan, the bank takes out a lien (a legal claim) on the property. If anything happens, it is allowed to claim the value of the loan from the sale of the property.
However, home equity will change over time either through repayment of your bank loan and if the property you own continues to appreciate in value.
Continuing with the example, your house has now doubled in value overnight. This leaves you with a property that is now worth RM800,000. Your home equity is now worth RM450,000 or 56%. This is because you own the increased value of the property.
The bank never has more interest than the amount you still owe it. If you pay RM100,000 of the loan, the bank’s equity in your home decreases by that much while your equity increases by the same amount.
In the end, you will own 100% home equity, or the full value of your house, once you finish paying off the housing loan. Therefore, if you are considering converting your home equity into a line of credit or overdraft facility, do so prudently and for the right financial goals.
So what can you do with only a partially interest-owned property?
Some banks offer home equity loans, which allow lending based on the value of a property that has not been fully paid up. However, this isn’t always referred to as a home equity loan.
For example, Alliance Bank has a mortgage refinancing service that serves this very purpose. It allows customers to withdraw overdraft funds from the bank, up to the 70% of the value of their home equity. This amount can be repaid with a more flexible repayment term when compared to a fixed schedule loan.
In this case, customers can choose to service the overdraft over a 35-year period or until the age of 65, whichever comes first.
You can also take advantage of your property’s value by turning it into extra cash for whatever you need. It could be for starting a business, investing in more properties, or even used to renovate your property to increase its value.
For the most part, the main difference between this and a proper mortgage is that you do not own 100% equity in the home.
A word of caution
This particular home financing option is not commonly used here in Malaysia, but may be helpful for entrepreneurs who are looking for extra capital to expand their businesses. Moreover, it has a higher chance of approval because you have something of value to put up as collateral when compared to an unsecured facility like a personal loan.
Keep in mind that doing so carries the same risks and requires the same financial discipline. If you lose sight of your financial goals, you may end up right back where you started, or even worse off financially.