If you have untapped equity in your house, it’s time for a wealth check, says John Bolton, Squirrel mortgage company founder.
You can leverage the funds to enhance your wealth, perhaps by considering one of these options:
Upsize your house
If you were a first home buyer last time round you probably would have had a high LVR and were maxing out your income, but now your income has probably gone up and you have more equity in the property, “therefore you can sort of lift yourself into a nicer part of the market which is typically what we see happen most of the time - it’s upgraders, it’s people stepping up in the market.
Start your property search
“Because you’re going to have a bigger deposit, your loan to value ratio is going to be lower.”
Invest
Stay in your house but look to leverage the equity to invest. Interest rates are “incredibly low” so you can borrow against the house at 3.5 per cent and find an investment property that will give you a good return.
There’s a but, however, and that is that while interest rates are low investment properties are still expensive and yields are low.
“The yield might not be that attractive relative to what you’re paying in interest anyway.
“I think anyone buying an investment property these days needs to do their homework. They need to spend a bit of time really understanding the market, what they’re trying to achieve and what the opportunity is in terms of capital growth versus maybe yields, getting a decent return on the property.”
Downsize
In Auckland it’s not inconceivable that some people have $1.7m or $1.8m equity in their house which is a lot of money to have tied up in an asset which is generating no return.
“One of the questions is, would it be worth downsizing? Would it be nice to free up that capital, or some of it, so you can invest it, and then how would you invest it. Those are worthy questions. Most people don’t do that. Most people don’t actively downsize until they’ve retired.”
Buy a business
You could use the equity as leverage for a business loan - although Bolton says a big “no” to using it for an overseas holiday or a car.
“The idea of leveraging your house like an ATM and spending it on ‘stuff’, that’s probably a bit crazy, right, in that at the end of the day we all need to build wealth.”
Money makes money, Bolton says.
“You build up all this equity, now your job is to get it working harder for you. We tend to be thinking quite short term in terms of budgeting. With the wealth that’s building up in people’s properties it opens up another conversation which is ‘how much am I worth and how am I making the most of that?’”
Everyone should have a balance sheet, Bolton says.
“They should understand what their assets are, what their liabilities are, what their net worth is and then they should be asking themselves ‘how do I increase that, how do I make that better?’”
Sharon Zollner, ANZ’s chief economist, points out the returns most anywhere are not great at the moment, with the returns on term deposits also very low.
Taking “your wins” from property throws up the problem of what to do with the money.
“Everyone, from someone who’s got a $20,000 term deposit up to fund managers managing billions, are all facing variations of the same thing, which is where on earth do I put my money?
“House prices look pretty high. The prices for commercial property and industrial property looks pretty high, equities look pretty high, bonds look pretty expensive.
“So basically the price of anything you can borrow money to buy has been pushed up over the last decade by central banks essentially printing money so there’s some liver damage from this long term life support that central banks have put the global economy on, so there’s nothing cheap out there to buy, so that’s everyone’s dilemma, I’ll be honest.”
If you rush to sell you run into low listings, though they have improved, and if you decide to stay put and renovate the costs can be eye-watering.
And while there have been boom times in housing, especially in the regions, the downside is that housing affordability is now a national issue.
“New Zealand, excluding Auckland, is now sort of where Auckland was 10 or so years ago when we thought we had a housing affordability crisis in Auckland.
“The regional renaissance is wonderful but it does come with risks, because it does involve taking on debt and the household debt is already extremely high.”
The economy is at an “anything could happen” point. The last two business cycles followed a pattern. In 1998 there was drought plus the Asian Economic Crisis, and in 2008 there was drought plus the Global Financial Crisis.
“Now we’ve got much of the country drying out very rapidly and we’ve got this coronavirus which is hitting our largest trading partner really hard, so you’ve got to say the risks are going up by the day. “It’s really uncertain.”
