Equity, use it or lose it

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Equity, Use It or Lose It. You might have heard this term quite often with regards to equity in your current property. Firstly, what is equity? If you’ve got X-number of assets, say a billion dollars, and then you’ve got $500, 000 worth of loans, liabilities, that 500, 000 in the middle is your equity. Generally, 80% of that is accessible without any extra lending costs. You’re looking at 400, 000 available to you. Now, we often hear, “Use it or lose it,” so what does that really mean? Now, when you’re thinking of use it or lose it, what that’s basically saying is, there are two constant changes that are occurring all the time in property markets. Number one is values changing, and number two is policies and lending that are changing.

If the amount that you could borrow and the amount that someone thinks their property is worth continues to change. You could have moments where the equity fluctuates from 400, 000 down to 300, 000 or even upwards to 500, 000. When that change occurs, this could actually be the difference between you having the right type of money to leapfrog to your next investment. That’s when people consider equity. You’re taking that out to go and buy your next, but when it comes to the use it or lose it phrase, it is actually a bit of an aggressive term, which is basically saying, “Whenever I find that equity available, I need to take it out, keep it somewhere for safe keeping, so it’s in my hands, not the bank’s. Then, whenever I need to use it again to leapfrog to my next investment, I can.” It’s a big more of an aggressive strategy, and with an aggressive strategy comes some downsides to it as well if things come up.

Now, if you did use it and values decline, then what occurs is a plus and a minus to that. A plus is, you’ve got the money that you won’t be able to get now if you redo it, but the downside is that equity position may be a negative, or if not a negative, if you haven’t leveraged that much, reduced since before. An example of the user it or lose it phrase has been done in Sydney where people who are looking to invest in property perhaps didn’t pull the plug but had their equity loans taken out and were ready to buy the next investment but just hadn’t done it yet. Now, if you imagine some significant declines starting to occur, that means that if they waited on getting the equity, they wouldn’t have been able to do that again. What they can now do is, they can use these moneys and actually start deploying it to other markets perhaps that are rising and allow them to use that equity that they now have elsewhere.

When it comes to the use it or lose it phrase, it’s important to consider that there are some risks that come with it, but the upside is, you’re constantly getting the funds available in the time where you know you can afford it right now because as we’ve seen over the last two years, lending has changed. Now, we don’t know if it will get tighter or looser, and we don’t know where that will head to, but what that really shows is, it’s a changing environment and taking advantage of that equity that you have is quite profitable if you make the right decisions of it afterward.

Now, in terms of he different ways you can use it, line of credits are one option, taking out funds and having them then back into your redraw account, which is really just paying back your loan but having money accessible inside it or putting it into an offset account. These are the usually common ways that people can grow and draw down their equity. From the usage of that equity, it’s important to consider your tax positions as well because when you’re looking at it with your accountant, if the uses of equity haven’t met the right things, then it may be a non-tax deductible debt, which is really important to consider. That’s it from us here at InvestorKit, the experts in wealth creation, helping you take action.