By Guest Blogger, Louisa Sanghera, Principal Broker,
Zippy Financial
Early this year, I wrote about how to use “lazy equity” to build wealth.
Since then, the property and mortgage market has evolved. Interest rates have gone up (and up!) and property prices have started to come back.
But that doesn’t mean you necessarily need to be cautious about your equity. In fact, the opposite could be true.
But first: what is equity and why should you recycle it?
In very simple terms, equity is the difference between how much your property is worth and how much your loan is worth.
If your property is currently valued at $800,000 and your loan is $450,000, then you have equity of $350,000.
In the current property market, the value of your property is evolving. Banks and lenders use a vast array of data and resources to help them assign an up-to-date value to your property, but it’s safe to say that the official valuation on any given property in Australia right now is likely to be lower than it was 6-9 months ago.
However, you may still be able to access your equity, so you can recycle it and put it to good use.
Recycling the equity in your property
To recycle the equity you have available to you, it means you take that equity and put it to good use.
Referring back to our earlier example, in this scenario you have $350,000. To avoid paying lender’s mortgage insurance (LMI), you may want to keep your borrowing to a maximum of 80% of your property’s value.
So, 80% of $800,000 is $640,000. You currently owe $450,000, so your usable equity is $190,000.
Depending on your income situation and whether you qualify for finance, you may be able to “recycle” this equity by investing it into another income-producing asset such as an investment property.
In an environment where property values are declining, you should carefully consider how far you want to leverage your equity. You essentially have 3 options, and the right one for you depends on your life stage, income and future goals.
1. Conservative: You keep your overall equity level at around 70-80%. This helps you avoid paying LMI and builds in a buffer to safeguard you against falling property prices.
2. Moderate: You access equity worth 80% of your home’s value. This pushes your leverage to the maximum level that banks are comfortable with, before they charge you LMI to compensate for the perceived extra risk.
3. Growth: You access equity worth up to to 90% or even 95% of your existing property’s value in an effort to build your investment portfolio.
None of these options is right or wrong.
Overall, accessing your equity can be done safely and conservatively. The key is to find the balance: don’t be reckless and over-commit yourself to financial obligations that could cause you stress, but remember that being too conservative and doing nothing means you risk having a comfortable retirement.
But what about my mortgage – I want to pay it off first and foremost.
Many people have this goal, and it’s understandable. Owning your own home outright would unlock an incredible feeling of freedom!
That said, planning to pay down your mortgage as quickly as possible without recycling the equity at any stage along the way, represents a huge missed opportunity to grow your wealth.
Here’s a really quick example:
→ Julie and Asad buy their own home and they spend the next 20 years diligently paying it off. They don’t invest, don’t access the equity and don’t renovate. After 20 years their home is fully paid off and they use the money they no longer spend on mortgage repayments, to update and upgrade their home. They also consider investing in a rental property.
→ Their neighbours, Ange and Alex, buy their own home. Three years later, they use the equity to buy an investment property. Over the next 5-6 years, both properties grow in value. Ange and Alex use the equity to invest in another 2 rental properties. After 20 years, their original home isn’t paid off. But, they own 4 properties. Their total equity across all 4 properties is around $1m, more than enough to pay down the small remaining debt on their own home.
By recycling their equity, Ange and Alex have been able to build long-term wealth through their property investments. Right now, we have a unique opportunity to leverage the strong valuations in our properties to access the equity for further investment. If you’d like to learn more about accessing your equity and growing your wealth, contact a Mortgage Broker who can talk you through your options.
Contact us today on 1300 855 022 or visit www.zippyfinancial.com.au
Louisa Sanghera - Director and Principal Award-Winning mortgage broker at Zippy Financial
Louisa created Zippy Financial after a 25-year career in banking, with the goal of using her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients grow their wealth through smart property financing. Whether you are looking to buy your first home, re-finance or build your property investment portfolio, Louisa and her team of experienced brokers can help guide you through the challenging maze of finding & securing exactly the right loan for you.
M: 0414083522 or 1300 855 022
E: louisa@zippyfinancial.com.au
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