More than 93% of mortgage holders in Australia have recently been classified as having some level of equity in their home. What this essentially means is the value of their home exceeds the amount they have owing on the property. If you’re in the unfortunate 7% without equity (or even if you are not) the question you may be asking is, “Can equity be manufactured?”… or, in other words, is there anything you can do to increase your equity rather than just sit on your hands and hope that property prices go up? The answer is absolutely.
For the roughly 7% of property owners that do not have the luxury of equity, there is a potential of facing several risks should market conditions turn against them. But for the overwhelming majority that do have some equity hiding in the rafters, there is both opportunity, and more importantly…. security.
No matter what your personal scenario, leveraging yourself up to your eyeballs is dangerous. While we all can fall victim to the desire of wanting what we can’t afford at one point or another, pushing yourself to your financial boundaries can cause slip ups and set backs.
A recent study showed that mortgage holders in NSW have the highest level of properties possessing equity across the country, with more than 95% homes fitting this description.
Western Australia was at the other end of the scale, with almost 10% of properties not currently showing evidence of any positive equity at all. This is largely due to a shift in the mining sector, reducing house prices and vacancy rates beneath the feet of said mortgage holders.
Without the cushion that equity provides, you can find yourself at considerable risk if property prices decline, or your working life changes, or worst of all a change in your relationship causes you to sell when you previously had no intention of doing so.
None of us can predict a rainy day, but we can make sure we own the best umbrella.
These potential pitfalls just further emphasis the importance buying the right property types in suburbs with strong growth potential, because equity brings with it financial options.
These options are varied, but for home owners one option may merely be some breathing room, the ability to keep up with mortgage repayments should interest rates rise (which they inevitably will), and a sound night’s sleep… which, in my experience, is worth it’s weight in gold!
Your equity can act as a strong umbrella for when that rainy day comes calling.
Further more, once the equity is at a decent enough level, you could choose to use that equity for further property purchases as part of a retirement plan. As mentioned earlier, doing this and reducing your equity to zero would go against the point, so doing your sums carefully and having the right purchasing structures in place is crucial.
So, other than buying well in good, strong growth driven suburbs with low vacancy rates, how can you increase your equity?
A strong way to do this, particularly while interest rates are at all time lows is to pay off the mortgage on your principle place of residence as soon as possible. By just increasing your payments by a small amount a week you can save literally hundreds of thousands of dollars as the years go by. (I go into this in detail at my events, see below for details).
Another is to renovate. This is not a model that I particularly have spent a lot of time in, but it can’t be denied that smart and cost effective upgrades to your home can be a great way of increasing the value of your property.
For savvy investors it also provides the opportunity to add additional cashflow positive properties to their portfolio. The benefits of this are obvious, but if they are smart and they are receiving an extra $10 - $20 a week from new property (which is the minimum of my expectations) they will feed that extra weekly money back into their home loan reducing it even faster.
It’s all about reducing bad debt as fast as you can, increasing your equity, and sleeping like a baby at night with the smallest amount of risk possible.
To learn more specifically about how Stone Invest specifically locates these kinds of opportunities for it’s customers, please come along to one of our complimentary educational evenings. Seats are limited, so to reserve your spot, click here now.