Three Best Ways to Reclaim Your Equity and Invest in Property to Grow Your Wealth

Earlier, we shared how to use equity to build your #investment property portfolio. If you are looking for a way to purchase your next property without taking ages saving up for the down payment? Your principal place of residence or your investment property can help you! Click here to refer to the previous article.

Over the years, the property and mortgage markets have evolved. Since May this year, interest rates have started to normalise, and property price growth has been under check.

First, let's discuss what equity is and why you should recycle it.

"Equity" is the difference between the value of your home and the amount you owe on your mortgage.

Assuming, for example, that your property is worth $1,000,000 and you have a loan of $550,000, then you have #equity of $450,000.

Your property's value keeps changing according to the current real estate market. In Australia, banks and lenders access a wide range of data and resources to determine up-to-date property values.

Still, it's safe to conclude that an official valuation is typically lower than it was six to nine months ago.

Nevertheless, you may still be able to reclaim and utilise your equity.

So, how can you actually reclaim your equity to put it to good use?

According to our earlier example, you have $450,000. If you want to avoid lender's mortgage insurance (LMI), you might want to borrow only 80% of the property's value.

80% of $1,000,000 is $800,000. You currently owe $550,000, so your extractable equity is $250,000 ($800,000 minus $550,000).

If you qualify for financing and can recycle this equity, you can invest it in an investment property that produces income.

It is essential to carefully consider how far you want to #leverage your equity when property values fluctuate. And that is where it is critical to appreciate your risk appetite, including risk tolerance and #risk willingness.

Ultimately, you have three (3) options, depending on your phase of life, earnings, and plans for the future.

1. Conservative: 

Maintaining a 70-80% equity level or lower. This buffer allows you to protect your investment from falling property prices and prevents you from having to pay LMI.

2. Moderate: 

Accessing equity worth 80% or slightly more of your home's value. Banks will charge you LMI if they perceive an additional risk because of the higher leverage level.

3. Growth: 

Using equity, you can access up to 90% or even 95% of the value of your existing property.

So, what is the right option for you?

These options are equally valid, but what suits you the best is subjective to your circumstances and goals. One should take advantage of the current 'Buyer's Markets' and, at the same time, should not over-leverage more than what is optimal.

Remember, the right balance is the key.

Don't be reckless and over-commit yourself to financial obligations that will cause stress, but don't be too conservative and do nothing if you want a comfortable retirement.
You may ask, "What about my mortgage? I want to pay it off first before investing in another one." 

This goal is common among many people, and I totally get it!

Of course!

It would be incredible to own your own home outright!

However, it is essential to point out that if you plan to pay down your mortgage as quickly as possible without recycling the equity, you will miss out on a significant opportunity to build wealth.

Let me show you two scenarios:

1. Kate bought her own house and paid it off diligently over the next twenty years. She didn't access her available equity nor invest in another property. With her home fully paid off after 20 years, she is now evaluating her options to build wealth for her retirement.

2. Meanwhile, Mark bought his own house. In three years' time, he bought an investment property with the equity he'd built up through his home. Both properties grew in value over the next 5 years. Using his available equity, Mark invested in 1 more rental property. After 20 years, his original home has not been fully paid off. However, he owns three properties, two of which bring in a steady stream of rent. Additionally, there is more than enough equity in his three properties, and he is already collecting passive income from his investments.

As you can see, investing in real estate will allow you to accumulate #wealth over the long term by recycling your equity. 

Did you know? You currently have a rare opportunity to access equity for additional investment by taking advantage of the high property valuations. 

Reaching out to a professional would be wise if you want to learn more about accessing your equity and increasing your wealth.