When homeowners think about using their equity to create wealth, the usual thought is to use the equity in their current home to buy a rental property, or perhaps a family holiday home. However, there are other options to put that equity to use to build your wealth, without taking on another property. Check out these ideas.
Make the most of an unused basement or sleep-out
Have you ever considered transforming your unused basement or sleep-out into a space to rent out – either permanently or an as Airbnb?
You may be able to transform an existing space without too much cost. If you need more substantial changes, perhaps to comply with a Building Code, you could get a top-up (subject to usual lending criteria) to complete required renovations. You can then use the additional income to pay off your loan quicker; being debt-free gives you the chance to build your assets and savings.
Plus, don’t forget to ask your accountant; using your property for either permanent rental or short-term rental (like Airbnb for instance) will mean tax advice should be sought.
Start a new business
Maybe you have thought about being your own boss but need a capital injection to get started. The equity in your home could help you buy a franchise business or cover your living costs while you put your time into building the business. However, this is also a catch 22 position we face where if you are leaving your current employment to start a business, even having strong equity, can sometimes be challenging to meet bank servicing criteria due to your regular PAYE income dropping out of the equation and the bank perceived risk that goes along with unproven business income (even if buying a new business although that potentially could help).
Or perhaps, you already have a business but can’t take it to the next stage of growth without a capital injection. You do need to still be able to afford your mortgage repayments, including any top-ups, so make sure you do your numbers carefully and don’t hesitate to ask for help. As your mortgage adviser, a key part of our job is to help you structure your repayments the most suitable way. I also have other options apart from main bank, that may get us over the line with sourcing funding however the cost is higher, and needs to be weighed up against the overall perceived value and risk of what the funding is for.
Investment in non-property assets
Approval for a top-up against the equity you already have in your home will be subject to each lender’s own criteria – for example, some may not approve a loan for alternative investments.
However, using the equity in your home could be a good way of diversifying your assets, and helping to build that nest egg. Maybe you have always liked art or have wanted to invest in collectables. Using the equity in your home could allow you to start investing in these alternative asset classes.
Perhaps you are thinking about just investing in some good old-fashioned shares. You can potentially use the equity to get gains in other investment forms – but again, you will want to do the numbers and make sure it is worth the extra interest costs. Talking with a specialist investment adviser may help you make better-informed decisions about your hard-earned money/equity.
Divert your savings into debt reduction
While this may not seem like you are using your equity to build wealth, done correctly, it can be. If you are putting money into a savings account at say 3.5%, that interest, after tax (resident withholding tax), is far less than the 4% or 5% you may be paying on your home loan. By paying off your debt faster, you are accumulating equity in your home quicker, and really giving yourself extra money, as you are saving on additional interest costs.
When it comes to mortgages and investment, the information we have provided here is of a general nature only, and not intended to be personalised financial advice. Before acting on any of the above suggestions, please consider having a chat with your adviser – to make sure the options you choose really are right for you.
An Adviser Disclosure Statement is available free and upon request.