The property and mortgage market has evolved with interest rates going up (and up!), but this does not mean you necessarily need to be cautious about your equity. In fact, the opposite could be true.

What is equity and why should you recycle it?

In 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 is safe to say that the official valuation on any given property in Australia now is likely to be lower than it was 6 to 9 months ago. However, you may still be able to access your equity, so that you can recycle it and put it to good use.

Recycling the equity in your property

To recycle the equity that you have available, means you take that equity and put it to good use. 

Referring to the 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. 

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 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 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 change your LMI to compensate for the perceived extra risk. 

3 – Growth. You access equity worth up to 90% of even 95% of your existing property’s value to build your investment portfolio. 

None of these options are 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 have a comfortable retirement. 

What about my mortgage? I want to pay it off first and foremost.

Many people have this goal, and it is understandable. Owning your own home outright would unlock an incredible feeling of freedom! That being said, planning to pay down your mortgage as quickly as possible without recycling the equity at any stage along the way represents a missed opportunity to grow your wealth. 

Here is an example… 

Julia and Tom buy their own home and spend the next 20 years paying it off. They don’t invest, they don’t access the equity and they don’t renovate. After 20 years their home is 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, Angela and John, 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. They use the equity to invest in another 2 rental properties. After 20 years their original home is not paid off, but they own 4 properties. Their total equity across all 4 properties is around $1 million, more than enough to pay down the small remaining debt on their own home. 

By recycling their equity, Angela and John have been able to build long-term wealth through their property investments. If you would like to learn more about accessing your equity and growing your wealth, contact a us to talk through your options.

Phone: 1300 855 022
Email: clientservices@zippyfinancial.com.au 

Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business. 

About the Author:   

Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.   

Connect with Louisa on Linkedin.   

Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).   

Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.