Saturday 20 January 2007

My use of home equity for investing

As previously discussed, we bought an investment property in 1999, just when the "boom" in Sydney real estate took off. The property cost just over $400K, and we took out a standard 25-year variable rate mortgage. The property appreciated significantly until 2003, and is now valued over $700K, so we have significant equity in that property. As loan interest on your own home loan isn't tax deductible in Australia (but you don't pay any CGT when you sell it either), but loan interest on investment loans is, we recently converted the loan to a fixed rate 5-year mortgage, so we could maximise payments off our home loan instead. At the same time I also arranged to make use of the available equity via a Home Equity Loan and I'm investing the funds over a period of 18 months a portfolio of US stocks, selected from candidate companies listed on the magic formula investing website. This strategy allows you to put your home equity to work as an investment, but, of course, is fairly high risk so is not suitable for all investors. It will pay off handsomely though if my US stock portfolio performs as well as the long-term average for the S&P-500 and interest rates on my home equity loan average out less than this rate of return. As a bonus, the dividends from the US stocks are fairly low compared to the interest on the home equity loan, and the difference can be claimed as a deduction on my personal tax return. As long-term capital gains in Australia are taxed at half your normal marginal tax rate, this means that I am basically able to reduce the tax paid at marginal rates (up to 48%) on my wage income, and will instead pay CGT at half the marginal rates (ie. up to 24%), assuming I eventually sell the stocks at a profit.

1 comment:

L. Marie Joseph said...

That's a good strategy you have.