I hope that you had a wonderful Easter. This fourth article in the series on accelerated wealth creation discusses using the underutilised equity in your home to create wealth.
On reading the title of this newsletter some readers may have asked “hang on, I thought Matt said your home is not an investment asset. So how can I create wealth with my home?” Well, your home is not the wealth but you can leverage the equity in your home to create wealth elsewhere.
Even if you don’t yet own your own home or have any equity in your home this is still valuable knowledge because one day you will have some equity. So it will be important for you to be prepared for how you can wisely use that equity to create wealth.
Equity is that part of something you own, not the bank. When you buy your first house you may start with a 5 percent or more deposit, and that is how much of your home that you own. That is your equity.
As you repay your home mortgage you own more of your house, and therefore your equity has grown. It is this equity that can potentially be your “underutilised equity” as discussed in the first article.
You can choose to use this equity to create wealth or to create immediate lifestyle.
Home equity funding your lifestyle
Our bank loves to send us suggestive letters about the many delightful things we could do if we went and borrowed more money from them against the equity in our home. So it is quite possible you are already aware of how to access your home equity.
In fact, most people have fully utilised the equity in their home to:
- Upgrade to a newer, bigger, better located home
- Fund their holidays
- Upgrade their cars
- Improve their current home with major renovations
- Pay for children’s education
Do any of the above sound familiar?
They possibly do since the banks make it very easy for us through redraw facilities and lines of credit.
But when you use your home equity to fund your lifestyle the money still needs to be repaid, plus interest. So you could be living outside of your means – a champagne lifestyle on a beer budget. Living outside your means potentially sacrifices your future lifestyle rather than creating wealth that funds your future dreams.
Use home equity to create wealth
To get rich faster use your home equity to create wealth. You do this by borrowing against the equity and using the borrowed money to invest. This is called gearing, as discussed in the last article. Since you are borrowing money it is important that you invest in growth assets such as shares and property. That way you aim to earn more than you pay in loan interest.
This strategy helps you create wealth faster by enabling you to be investing even when you may have all of your income focussed on repaying the main part of your mortgage.
Many people think they need to have repaid their home fully before starting to invest. For people with a low tolerance of risk that may be appropriate. However, if you can manage the risk of gearing then using your home equity to invest will get you into wealth creation sooner. The sooner you get in, the longer you are in, and hopefully therefore the more you can earn.
How to access your home equity for investment
One of the most common ways to borrow against the equity in your home is to create a new line of credit loan that is secured against your home. So you will end up with your mortgage plus a separate line of credit.
A line of credit gives you flexibility to invest the amount wherever you like – the bank doesn’t really need to know. Plus, as you buy and sell investments you can withdraw from and repay the line of credit as you wish, much like a bank account.
Once you have established your line of credit it is important to obtain expert advice on the investments you will use. Expert advice is valuable in helping you achieve more return than you pay in loan interest.