With the right financial and investment advice, you can make decisions now that will help pave the way for a financially free retirement. That is, provided that you don't let fear hold you back...
If you have untapped equity in your home, it's like stashing cash under your mattress: it sits there, unnoticed and unused, and fails to help you reach your financial goals.
"Equity is unrealised value which, with property, you can borrow against to use for other means," explains Debbie Williams, director of Equity Finder.
In simple terms, equity is the difference between the value of your home (say $500,000) and how much you owe ($300,000). In this case, you would have equity of $200,000.
"Many people are reluctant to access equity in their own home because they think they're putting everything on the line. If something goes wrong, they could lose their home, the roof over their head," Williams says.
"But the same could be said if you don't do anything. What opportunities are you letting slip through your fingers by thinking that you don't have the funds to invest?"
In order to really make your equity work for you, you need to adopt the right mindset, Williams explains. If you are fearful about tapping into your home equity and you're not committed to the process of leveraging your funds into an investment, you could wind up in trouble.
"I recently worked with a couple in their 70s. They had watched my husband and I renovate and develop property over a number of years and finally wanted to get in on the action," she says.
"I took them to the bank and organised a loan for them."
The pair planned to buy a large 1,200m2 block of land that they could split and construct a new house behind the existing dwelling. They tapped into their equity and got approved for a loan of 70% of the value of their home, which freed up $450,000 – more than enough to cover the house and land's $229,000 purchase price.
The mortgage product was a line of credit, which means they were only required to pay interest on the funds that were drawn down. So even though the facility was for $450,000, they would only pay interest on $229,000.
"But, the amount of money was too much for them to contemplate – so they went back to the bank and reduced to the line of credit from $450,000 to $250,000. That gave them enough to purchase the property and pay all of the associate buying costs," Williams says.
"What they didn't consider was the building cost for the new house, and when they went back to the bank for more money, neither of them was working any longer. As a result, their finance was refused."
Williams says all of their issues wouldn't have existed "if they'd been prepared to continue with coaching".
"When the fear factor comes in, it can be very crippling for the inexperienced and faint hearted," she says.
"But if you don't overextend yourself financially, using your home equity can surely help you fast track your wealth creation goals."
This particular couple didn't lose out entirely: they ended up selling their own home and moving in with family members, and they're now building on their block of land with the cash leftover from the sale of their home.
But Williams warns borrowers to make sure they educate themselves fully before tapping into their equity, to make sure they follow the right steps and don't get caught out like her clients did.
Debbie Williams' tips for success:
- Have a plan for your funds
- Stick to the plan!
- Have an exit strategy if the plan isn't working
- Get help if you don't know what to do
- Pay for the help you need, if necessary
