The invisible treasure
6.5 min read
Take a pick-axe to your home and you’ll find lots of things that aren’t ordinarily visible. Wiring, insulation, footings, the list goes on. But no matter how hard you look, and how hard you swing, there’s something hidden in the recesses of your walls that you’ll never lay your eyes on. Ironically, it’s the most valuable thing in your house.
Real estate serves multiple purposes for Australians. Obviously, a roof over our head helps to deal with Melbourne’s weather.
But another purpose that real estate serves is wealth creation.
We can only earn so much money slugging it out week-to-week. And when the school fees, insurance premiums, utility bills and life’s other financial demands keep rising, it’s quite hard to keep the savings plan ticking along.
That’s where EQUITY steps in.
The performance of property
Let’s take a look at Melbourne’s property market over the last decade.
Yes, there was some anxiety between 2017 and 2018 when the heat came out of the market. In reality, the concerns were media-driven. Concerns arose because we’d become pre-conditioned to double digit annual growth in preceding years.
Real estate should always be viewed as a long-term prospect.
In Melbourne, property has been a very valuable class for those that have had skin in the game.
Across Melbourne, Domain reported the median home price had increased from $553,693 in 2010 to $855,248 in 2019. That’s growth of 54%, averaging more than $30,000 in passive income for owners each year. Especially as the property is already serving the primary purpose of keeping the winter chills outside, that sort of passive income is not to be sneezed at.
Yes, owners in the sought-after suburbs in the inner-ring we’re really lapping it up. The median house price in Prahran, for example, doubled from $720,000 to $1,405,000 between 2010 and 2019.
But, even if you were in the South-East mortgage belt, you were doing well. In Keysborough, home-owners saw median property prices in their backyard rise from $420,000 to $735,000 – a rise of 75%. If you were to look at that growth as though it was a savings plan, that’s the equivalent of $35,000 a year … it’s pretty-hard to put that away every year on the median wage.
What is equity?
It’ll surprise you how many people are actually unsure what equity is. And because it’s a term that’s bandied around all the time, those who are uncertain what it is, are too afraid to put up their hand and ask, out of embarrassment.
But there’s no silly questions at Entourage Finance.
In short, equity is the accumulated worth of your property after subtracting the amount you still owe in loan repayments.
What can I do with it?
Let’s say you bought a unit in 2015 for $500,000. You might have taken out a loan for $400,000 to purchase it and have, since then, paid off $150,000 in principal. That means you still owe $250,000.
However, since then, your unit likely increased in worth. In fact, your lender has now valued the unit at $600,000.
So, subtracting the $250,000 you still owe from the new value of your unit means you have $350,000 in equity in your unit. Not bad!
Lenders will let you get out the pick-axe– Disclaimer: Metaphor only – LEAVE THE PICK-AXE IN THE SHED!! – and extract that equity from the deep cavities of your home.
This equity can be used to source finance for a new property investment. A home-equity loan can help you build an investment portfolio, supporting your wealth creation ambitions. If picking the right area, the property may even end up positively geared.
But note: even if you own your property outright, lenders won’t let you use the full value of your property. They will have limitations on the Loan-to-Value Ratio (LVR).
Can I fast track equity?
This is a tricky one because there are a lot of variables involved.
Now, you can add value – and therefore equity – by increasing the amenities in your home. For instance, another bedroom can add value to your property, so can a second bathroom.
But features like pools aren’t definite value-adds. At sale time, some buyers will think a pool is a summer must-have; others hate the idea of maintaining it and the costs to heat it.
And in any event, it’s contingent on what the wider market is doing.
If the market is in the midst of a correction, putting in a $30,000 ensuite is literally pouring money down its drain.
There are simpler ways, including:
- paying off your loan principal faster;
- setting up an offset account.
In the instance of the latter, money that’s placed into the offset account is removed from the loan balance when calculating interest repayments. You can funnel the savings you make in interest repayments onto the principal.
What’s the first step?
You need to organise a property valuation. Talk to us – we know who to approach.
Why do it?
Property has been a proven performer. In Melbourne alone, median property values have risen 54% since 2010, and that’s even with the correction of 2017-2018.
For most people, their property is their most valuable asset. Unlocking its potential is a popular way to build your wealth.
But be mindful, unlocking equity means the amount of your home loan will increase, which results in larger repayments.
Disclaimer: Entourage Finance recommends customers consult an accredited financial adviser prior to utilising the equity in their property to purchase other assets.