Equity: Your secret weapon for growing your wealth

One of the key benefits of owning growth assets such as property is that they… grow! Sounds simple but one of the keys to generating wealth over the long term is acquiring assets that will grow at a rate higher than the rate of inflation!

For most Aussies, they will start this journey with the purchase of their first home to provide a stable base for their family. We often start with a very small deposit, say 5%-10% and over time, depending on the suburb we bought in we hopefully see our home loan shrink, and our property value grow!

The part of the property we own (not the bank) is what we call our equity i.e. if we were to sell our property our equity is equal to the cash we can bank after the sale (excluding sale costs) i.e. your property value less what you owe.

To focus on building wealth the first steps I discuss with my clients are:

1. Create a surplus on your budget and

2. Build equity in your assets by accelerating the reduction of debt

When you are successful at these two steps you open the door to investing and the good news is you don’t have to wait until the mortgage is cleared!

Now before you get too excited there are 3 main things people do once they have been successful in creating some equity:

1. Buy depreciating assets (cars, boats and caravans)

2. Renovate their property

3. Invest in other growth assets

So, you upgrade the car and stick it on the home loan – it may feel good for a short time but borrowing long term for a car or boat on your mortgage is not a great idea unless you pay it off quick!

Renovating your property is very popular because let’s face it, new is better than old. Australia suburbs with a high level of home ownership generally see increased growth due to the fact homeowners like to improve the homes they live in! This can be a good thing.

That said, due to your banks willingness to lend you money against the value of your property there is the ability to borrow and invest. Now anything that involves borrowing involves risk and investing with borrowed funds is no different. For most people their first choice is to buy an investment property though other options can also include buying shares and other managed investments including Exchange Traded Funds (ETF’s) and Managed Funds.

In Australia tax laws do encourage borrowing to invest in that the loan interest costs for investment borrowings are deductible to your income. That said there are a number of risks that should be considered, and advice should always be sought to ensure you are making appropriate and informed decisions.

As a Financial Adviser, when I’m approached to consider borrowing to invest as a strategy, there are a number of considerations to take into account:

1. Do you have good surplus in your cashflow and could you handle a significant rise in interest rates?

2. How stable is you and your partner’s employment?

3. Do you have good personal insurances in place in case of death, disability or a traumatic illness?

4. Is the timeframe of the investment appropriate and do the assets match the strategy?

5. What is your tolerance for risk?

These are not the only considerations but what I can say is the people who invest most successfully have a long term plan and are willing to seek good advice!

So if you’ve build some equity and are wondering what are the next steps to building your wealth then please reach out today and book a discovery appointment with one of our qualified and experienced advisers.