How To Use “Lazy Equity” To Build Wealth - June 2022
July 1, 2022 / Written by Rich Harvey
By Guest Blogger, Louisa Sanghera, Principal Broker,
If you’ve owned your home for at least two years, then there’s a really good chance you’ve built up a decent amount of equity. In other words, your property is worth more now than it was two years ago.
What does this mean for you now? It means you have options!
This is because you have built some wealth up in your property, and you can use that to improve your financial position overall.
As a finance broker, the prospect of investing in property and where property prices are headed is a conversation I’m having over and over again with my clients at the moment. So, I want to share what the property price outlook is for property owners, who would have had significant equity value increases over the past 2 years; and also, how you can capitalise on this in the current market.
The outlook for property prices
It’s no secret that property prices increased by a massive amount in the last 2 years, and that growth run was always temporary. Property values cycle up and down, and now the market is entering a phase where growth is slowing down and likely to go backwards for a short period.
For instance, let’s say you bought a house in 2018 for $700,000.
You handed over a $100,000 deposit and took out a loan of $600,000.
Therefore, you started with equity of $100,000.
Following the boom in property prices, its value has gone up. Today, that property is worth $1m and you’ve repaid some of the loan, which is now sitting at a balance of $550,000.
Your equity has therefore grown to $450,000.
Property prices are expected to fall over the next year or two. It’s unlikely that they’ll crash to pre-pandemic levels, but a reduction of anywhere from 5% to 15% is predicted. (Note that these are predictions only – it’s impossible to know with any certainty exactly what will happen and bank economists typically get it wrong.)
Going by the experts’ predictions, your home that is worth $1m today, could fall in value to between $850-950,000 in the next couple of years. Whilst this is a drop, it still means you have access to a decent amount of equity. This is equity you could put to good use by investing in property. Buying a property in the current market means you can buy at a discount to long term value and not have the crazy competition that was around last year.
Using lazy equity to invest in property
Lazy equity is a term that describes the equity you have accumulated in your property, which you’re not accessing to put to good use.
To get ahead financially, there’s a number of things you could do with your equity:
- Leverage it as a deposit: You can withdraw some of the equity and use it as a deposit on an investment property. This gives you another property asset which will ideally grow in value long-term, so you can build wealth and benefit from tax deductions for property investment owners along the way.
- Debt recycling: where you borrow money for investment purposes, such as shares or property, and then work as hard as possible to pay down your own home loan (as it’s not a tax deductible debt). As your own home loan balance goes down, your investment debt goes up. The goal is to eventually completely pay off your non-deductible own home debt, and increase your deductible investment debts.
- Redeploy equity into investments: You could withdraw some of your equity and invest it into other investment classes such as shares, bonds or index funds. As long as the return on investment is greater than the interest rate you’d pay on your mortgage, you’ll be financially ahead.
Of course, all of the above options come with certain risks. I’m not a financial planner and none of this should be taken as advice – rather, I want to educate you about some of the options available to you, so you can make informed decisions about your financial future.
The right next move for you will depend on how comfortable you are taking risks and taking on new debts, and how far away you are from retirement, among other things. It’s a great idea to speak to a financial adviser and buyers’ advocate about your potential next steps. If you’re interested in learning how much equity you have and what your options are when it comes to accessing equity and investing in property contact your broker for a discussion.
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.
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