How and when to use equity in the family home

family home investments

According to a study published in late 2017 by the Switzerland-based Bank of International Settlements (BIS) Australian residential property prices have grown by a staggering 6,556% since the early 1960’s.

Or, perhaps better described as a more modest average nominal increase of 8.1% every year. So, if you have been lucky enough to have lived and owned property through this period chances are you have built up some serious equity along the way.

The question facing many Baby Boomers now, and in the years ahead, is what do I do with my property windfall and relative increase in wealth?

Well that depends on a number of factors, such as how many properties have you been able to secure over the journey, what is their relative value, what sort of retirement are you wanting to have and how much is your ideal lifestyle really going to cost you? Let’s perhaps look at 2 different scenarios that you may find yourself in;

SCENARIO 1: Asset Rich but Cash-Flow Poor?

According to an article on Domain, if you had about $30,000 to buy a house back in 1975, you could have bought in almost any Melbourne suburb.

A house in Balwyn ($34,000) cost roughly the same as a house in Bundoora ($33,750). A house in Hawthorn East also cost about the same as a house in Frankston North.

According to www.realestate.com.au in Oct 2018 the current median house price for Balwyn sits at $2.33M, $736k for Bundoora, $2.05M in Hawthorn East, and almost $508k in Frankston North.

And had you been lucky enough to have picked the suburb of Middle Park you might well feel like you have won the Melbourne property lottery with median house prices now sitting at $2.74M.

The problem for some Australians in this position is that, whilst on paper, they appear well off, the reality is that many are still struggling to make ends meet once they decide to stop working. That is, they are now asset rich but cash-flow poor.

You see unfortunately the house you live in, otherwise known as your Principal Place of Residence (P.P.R) generally speaking will not generate any income for you. Unless of course you want to open up your house to paying guests by running it as a bed and breakfast, boarding house, or renting out a room or two through sites like AirBNB or the like.

How do you then access all or some of the equity that is now tied up in your own home?

Well assuming you are now without a regular and sizable income, you may find it very difficult to obtain any form of lending, outside of perhaps the somewhat expensive option of a reverse mortgage for example.

Or, you may decide to sell up and downsize into a less expensive property. For example, you might sell your old 5-bedroom home on a good size block to buy a brand new low-maintenance townhouse or apartment in either the same area, or perhaps into your favourite sea-change, or tree-change, location.

You may then re-invest the balance of those funds to help fund your retirement lifestyle.

SCENARIO 2: Asset Rich & Cash-Flow Rich?

Obviously, this would be the ideal scenario for most Australians to find themselves in.

That is, you have both sufficient equity built up in your own home, as well as a reliable income source to enable you to qualify for an appropriate level of lending. With the Banking Royal Commission scathing in some of the bank’s lending practices this will undoubtedly only become harder in the months and years ahead.

However, many older Australians who have found themselves in this position previously, or now, have decided to redraw some of their equity for a variety of purposes such as for further property investing, renovating or upgrading their PPR, or to assist their children, or grand-children to get their foot on the property ladder via the gifting, or lending, of some, or all, of the money required.

Whilst, some Australians are happy to use the equity in the home to help leverage their own portfolio or help their offspring, this is not something that is without risk. You need to carefully consider the worst-case scenario. That is what if for any reason you, or your kids, become unable to repay the loans?

What would happen if the banks chose to foreclose on your loan and you were forced to sell the family home (often at a price that may be less than it may be worth).

How you choose to use, or not use, the equity in your home should be the result of a careful plan, clear strategy, and that is commensurate with your levels of knowledge, skill, experience and risk profile. Consider all your options before making a move.

tips for investing equity from family home

About the author: Matthew Bateman, pictured above right with business partner Luke Harris, is co-founder of The Property Mentors, a Melbourne-based business comprising an elite team of property professionals who educate, motivate and facilitate clients from all around Australia. His new book, Let’s Get Real (Major Street Publishing $29.95) is now available. For more information click here

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