What leverage means
Leverage is using borrowed money to control an asset larger than your cash contribution. If the asset rises, your return on contributed capital may be magnified. If it falls, your loss on contributed capital may also be magnified.
Equity is not cash
A property can have substantial paper equity while still producing negative cash flow. Accessing equity normally requires lender approval and creates additional debt.
Using the home as security
Cross-collateralisation or borrowing against a home can increase the consequences of an investment problem. Obtain independent credit and legal advice before placing an owner-occupied home at risk.
Stress-test the debt
- What if interest rates are 2 percentage points higher?
- What if the property is vacant for eight weeks?
- What if an urgent $10,000 repair occurs?
- What if income falls temporarily?
- Could you avoid a forced sale?
Borrowing capacity vs comfortable debt
A lender's maximum loan is not a recommendation about what you should borrow. Household goals, risk tolerance and cash reserves matter.
For general consumer information on borrowing to invest, see ASIC Moneysmart's current guidance. Independent licensed credit advice may be appropriate.