Alright, been getting a lot of questions lately around equity. What is it, how can I use it, etc.
Let's break it all down. First of all, what is equity?
OK, here's an example.
Your Asset
So we've got an asset, let's say it's our own home that we live in, that has a value of $500,000.
Well, according to the banks, we can use up to 80 percent of the value of that home (minus our debt) which becomes the 'usable equity'. So $500,000 x 80% is $400,000. Minus our debt (let's say it's $300,000 for today's example), means that we have $100,000 of usable equity, that we can go and do something with.
Your Serviceability
Now, first of all, in order to use this equity, the banks need to see that we can service it through our income. They assess our assets and liabilities, income, debts all those things. So provided that we can service it, the banks will allow us to take that $100,000 of equity. Now, as soon as we use that, we pay interest on it. Keep in mind that it's not 'free cash' to come and go as you please so use it wisely!
What can you use it for?
So, secondly, what can we use it for? Here are some of the common thing people use equity for - cars, boats, pools, holidays, to invest in shares, investment properties, school fees and renovations. So, can I use it for any of those? The answer is yes! You can go and use it for whatever you want to use it for!
But is it financially wise to do that?
Now, the third part of it is, is it financially wise to go and do that, or is it just simply a lifestyle enhancement choice? So, let's go through it;
Car: In most cases we buy ones that are too expensive for our means and have trouble repaying.
Boat: Definitely a lifestyle choice.
Pool: Lifestyle, especially if you've got kids. Bit of an emotional thing, big blue babysitter.
Holiday: Lifestyle.
Shares: NOT lifestyle.
Property: NOT lifestyle, but enhanced wealth down the track which will improve our lifestyle, right?
School fees: Lifestyle in a lot of cases.
Renovations: lifestyle but also improving the value of our home.
Now, let's have a good think, does the pool improve the value of our home? Depends who wants to buy it, or depends what the valuer realizes when they come out to value it, okay.
So, equity, I hope this gives you a better understanding of what it is and how we can use it and then finally what we can do with that equity, but then finding out what the wisest thing to do with that equity is.
If this has prompted questions or thoughts, please don't hesitate to reach out to us! Get in touch to find out more or pop on over to our Buyers Agent Service page.