How to use your home equity

You might have some friends over for dinner or be at the pub with a mate and then it happens. Your mate says, “Powerball is $150 million this week, we should buy a ticket.”

20 minutes and a lot of laughs later, the shared purchase is agreed. Inevitably, you’ll have talked about all the things you’d do with your share of the winnings.

After the immediate “would you quit your job” question is answered, everyone’s idea of what they’d do with the extra money is unique to them.

If you’re reading this, you probably didn’t win the jackpot. Many of those ideas could tangibly improve your lives and some (not all, of course) may necessarily require the astronomically unlikely payday of a lottery win to become a reality.

If you’ve purchased your own home and worked hard to ensure the mortgage gets paid like clockwork, when teamed with steady house price growth, you will likely owe the bank less than the value of your home. The part you don’t owe is known as equity.

It’s this equity that, if accessed wisely, could enable you to make one or two of those lottery winning ideas real.

 

 

• At LongView we’ve developed HomeFlex to help you with exactly this (find out more HERE)
• HomeFlex is an equity release solution that provides you with funds now, without interest or monthly repayments, in exchange for a share of your home’s future growth.

LongView’s property experts frequently share stories about how their friends, families and clients are using the equity in their homes.

Enjoy

Treat yo’self. Without a doubt, most of your ‘how do I light my lottery winnings on fire’ ideas will have started here.

With interest rates on the rise, the holidays and new cars that excite and refresh us have had to go on hold. It hasn’t helped that through covid and the period of inflation that we’re still living with, the prices of both has increased significantly.

For those with more of an imagination, reddit has several threads dedicated to this question and here are some of this author’s favourites:

• Hiring a full time sushi chef and installing a Japanese vending machine, with an endless supply of both cold and hot beverages.
• Opening a bar where you play your blues and jazz records while customers rarely visit, but if they do, there’s only 5 seats.
• Hiring barbershop quartets to surprise perform for each of your friends.

Releasing the equity in your home to pursue some of the above ideas might make you feel like an eccentric billionaire that has lost the plot, which is great, if that’s your thing.

For many, though, accessing the equity in their home will allow them to work a little less. Think of it as buying the most valuable asset of all. Time.

Invest

Whether you’re bootstrapping your own business or have decided to buy an existing one, you’re going to need cash.

Similarly, your existing business might be bursting at the seams, and you need to invest in new equipment to allow you it to keep growing. It could be that you’ve signed up a new client and need to pay for stock that will help you fulfill orders as they come in.

After all, you have to spend money to make money.

Getting access to a business loan with a reasonable interest rate and few restrictive covenants (conditions that can restrict how freely you can run the business) can be a challenge.

One option is to release the equity in your home to effectively act as your own lender. While not suitable for every situation, it may provide you the flexibility you need to focus on serving your customers without distraction.

Assist

“The first half of our lives are ruined by our parents and the second half by our children.”

– Clarence S. Darrow (an American lawyer of zero relevance to us Australians)

At a certain point, every parent sits down to discuss education for their child. For many, private schooling will be a certainty and for others it is certainly not an option. For the rest, it is a question that needs answering.

With Year 12 fees at Geelong Grammar School (yes, the one that King Charles spent a couple of terms at in the 1960s) reaching $50,000, this is no small question. Whether such an investment represents good value for money or not is a conversation for a different time and place.

But for those families seriously considering private schooling for their child, releasing the equity in your home can make this 13 year commitment possible.

In other articles, we’ve discussed the importance avoiding Lender Mortgage Insurance (LMI) when saving for a house deposit by targeting a Loan to Value Ratio (LVR) under 80%.

As they search for their first home, your slightly more grown-up children will realise that this is no simple task. For many parents, that reflex to want to assist their children will be just as strong as ever.

One way to make this possible is to release the equity in your home to create equity in their home. Helping them avoid the costly LMI in the process.

The unexpected

As life tends to do, unexpected challenges affect us all.

For the 12 month period to February 2023, a covid impacted year, 2.3 million people left or lost a job. Of those, 7.9% were retrenched, 0.7% were dismissed and 5.5% suffered an injury or poor health (Source: ABS). This means that at least 300,000 Australians lost their income source for reasons outside of their control.

For those without income protection and retrenchment insurance they would have to navigate the period of uncertainty by relying on their partner’s income, government welfare (if available) and reducing their living standards.

Under certain circumstances, releasing the equity in your home could be an effective way to maintain your pre-unexpected standard of living.

Another classic unexpected cost is the motor vehicle that just blew its head gasket or had its transmission seize up. From the thousands of dollars to repair/replace or the tens of thousands of dollars to buy a new car, the equity in your home can help pay the bill.

If equity release products like HomeFlex had have been named more conveniently, then it could have become Patches O’Houlihan’s 6^th D of dodgeball. Dodge, duck, dip, dive, dodge and DomeFlex. Oh well.

Disclaimer: Please note that this article is general in nature and does not take into account your personal circumstances. Always seek professional advice before making any significant financial or legal decisions.