She's On The Money - Equity Explained: Is It Really the Shortcut to Getting Rich?

Starting point is 00:00:00 My name is Natasha Bamblett, I'm a proud First Nations woman, and I'm here to acknowledge country. Ti, gilinyan ganya, nianakaka yao yinbina waka, nianakai nianbina yakarumja, duminyagumiga dumiga ithawaka nirawamundamun imalan. Mumu bangada boma ininyalan waka, kaanon yakarumja, wutunarana. Hello beautiful friends. We gather on the lands of the Aboriginal people. We thank, acknowledge and respect the Aboriginal people's land that we're gathering on today. Take pleasure in all the land and respect all that you see. She's on the money podcast acknowledges culture, country, community and connections, bringing

Starting point is 00:00:41 you the tools, knowledge and resources for you to thrive. She's on the money. She's on the money. hello and welcome to she's on the money where we unpack money stuff so you don't have to pretend to already get it have you ever heard the phrase you could use your equity said like it's some kind of magical wealth building strategy and wondered whether it's actually smart or just sounds impressive because that sentence seems to get thrown around a lot and today we are unpacking what it really means before anyone does anything too expensive. I'm Victoria Devine and not only

Starting point is 00:01:35 was I a financial advisor, I actually currently own a mortgage and asset finance broking company and with me is one of the best brokers in my business, Ms Jacqueline Walsh. I mean you're all good but like how else do you explain that? Thank you. Welcome back to the show, we've had you on before. Are you excited to dive in and talk about equity? Always. I feel like everyone throws it around, but not many people actually know what it is. So if you're listening to this and you're like, yeah, of course I do. For every person who says, yeah, of course I do, there's like 10 that are like, what equity? So we had you in for an episode at the start of the year to fill us in on all of the things that changed when it comes to mortgages over the last

Starting point is 00:02:14 year. And I asked the community for their questions too. And one thing that just kept coming up and we promised a whole episode on was equity. And what really stood out was how many people thought that they had equity, but had no idea what to do with it, how to access it, whether they should. So I knew that we had to probably do a bit of a deeper dive on a specific topic, not just a broker Q&A. So now that we've discovered in our last episode together, that in very simple terms, equity is the difference between what your property is worth today and what you still owe the bank. I think it is time to dive a little bit deeper. So Jacqueline, first cab off the rank, we're not doing any fluffy stuff here.

Starting point is 00:02:53 I just want to do equity content. Say I have a property, it's worth $900,000. Yes. I've got $800,000 left on the table to pay off on this loan. Can I go to the bank and say, can I have a hundred grand for whatever I want to do? No. Oh, so it's not just free money? No. Okay. Well, what is it?

Starting point is 00:03:13 So you're right in saying that the way that you look at equity is what your property value is worth today, less what your current loan is. So if you said that your property value was $900,000 and your loan is $500,000, people might look at it and say, well, that's $400,000 in equity that I've got. Well, it is true. Because if you sold your property. Correct. But does it mean that you can access $400,000? Without selling your property. Correct. Okay. What could I access? In most cases, you can access up to 80%. Some other cases you can go over that, but there would be potential LMI. So, lenders walk insurance charge to that. But let's just say you were to access up to 80%. You're looking at around taking out an additional $220,000

Starting point is 00:04:00 in equity once you've got your $500,000 loan plus the $220,000 equity release. Cool. So, what are the most common things that you see people wanting to use their equity for? because you can basically pull it out for whatever. True. Yes. And false at the same time. Correct. Some banks are going to really care about what it is that you say that you're using the equity for. So in some cases, you can't use it for business purposes. Other cases where you might say that you're doing a renovation, but you're trying to take out say $400,000, that's probably not going to be a cosmetic renovation, more of a structural. They'll allow you to take it out, but they're going to want to see you structure it differently. So it could be a building loan rather than just a

Starting point is 00:04:43 cash out scenario. Yeah. Yeah. And that's just them managing their risk and making sure that everything is hunky dory, not necessarily, you know, cause you can't do that thing. They're just like, that's a lot of risk for us to take on. Yeah. So if you're going to take out $400,000 for a renovation, they want to see that the, obviously the changes that you're saying are going to be made to the property are getting made because they're opening themselves up for more risk. So they're going to want to, like you said, manage those funds to the builder. Yeah. And I would say the most common equity cash out that we do as a business is people taking their equity out to buy another house.

Starting point is 00:05:16 Yes. Would you agree with that? Yeah. So you're using that equity as the deposit on the next property. So you don't actually have to save up again. Anything else? Any other reasons why you might get equity out? Yeah. Purchasing a new car, purchasing a boat, investment, things like that. So if I go to my bank and say, can I use my equity to buy a boat? are they just going to say yes? If your LVR loan to value ratio allows it and you can service that

Starting point is 00:05:40 debt, then yes. I could have a boat. You can have a boat. I love the idea. I don't know how to drive a boat. As someone who deals with mortgages every day, I mean, both of us, but you specifically, what are your personal feelings about people using their equity? If it's for the right reasons. Yeah. And I say that if you're looking to say leverage off equity to purchase a new property and another investment property and build your portfolio, that to me is for the right reasons. Obviously, you need to speak to the bank or a broker and make sure that what you're doing and trying to achieve

Starting point is 00:06:12 is right for you and it's going to be beneficial. Yeah. But yes, if you're asking me, I think that I'm all for it. Yeah, so am I, just not for the wrong things. Like I wouldn't, I'm very apprehensive when people say they want to take out their equity for a holiday. I'm like, oh, you're not going to have anything to show at the end of that.

Starting point is 00:06:29 Like you could technically take out equity for a holiday, but from my perspective I think we should only be using it to build wealth so whether that is purchasing assets that increase in value or you're using your equity to invest in shares or you're using your equity to get into another investment property that's probably where my personal values lie and I think yours are kind of similar yeah there's definitely been times where I've told people that I don't think that they should be yeah not declined them but just sort of but as a good broker, you kind of are that sounding board of like, hey, that sounds really great in theory. Personally, I don't know if this is the best idea given I've looked at your holistic financial

Starting point is 00:07:07 situation, but like that's just putting the client first. And then if they decide to go through with it, great, I can probably get you the best deal. But we're just flagging that this might not be the best financial decision, but it's also yours to make. Yeah. You've got to weigh it all up. You've got to weigh up rate, LVR. Is there any lender's mortgage insurance getting added? Is your rate increasing because of this? It really needs to be beneficial to you at the end of the day to follow through with it. Yeah. And in your experience, what do you think is the number one thing that people misunderstand about equity? I would just say how much they have. And I guess the misconception is that, you know, you might have $400,000 in equity and

Starting point is 00:07:43 therefore I can access it. Yes and no. You can access it if you were to sell your property. that's going to be cold hard cash. Yes, because if you've got a $900,000 property and you think you have $400,000 equity and you sell it for $900,000, you're going to have $400,000 in your hands. Less the agent fees. Yes, like being really clean about it. But that's not how it works when you're asking the bank to have that money back because they still require security over your property and security that you're going to pay back the loan. So, they need the deposit still kind of hiding in there. Yeah. So, people would assume that if I've got it there, I can use it. But there's sort of two, I guess, areas that need to be ticked off, which is A, do we have

Starting point is 00:08:25 the equity there? Yes. And B, can we service what we're trying to take out? Yeah. If you can't service that loan for the additional equity amount that you're trying to release, you can't, you can't access it. Yeah. Yeah.

Starting point is 00:08:35 And so there's a lot of things or hoops that you need to jump through that are not really hoops. It's like, technically you're borrowing the money. You need to be able to pay for it. That kind of makes sense. Unfortunately, you actually need to make the repayments back on that. Damn it. I thought it was free money. So when you're looking at properties values on like domain

Starting point is 00:08:54 or realestate.com.au, you get a low, mid and a high value range. And sometimes I feel like that varies a lot. Like I've been looking in our area a lot recently and it's like low 900, mid 1.3, high $6 billion. And you're like, wait, what? What's going on? How can someone get a rough sense or a rough idea of whether they may or may not have equity before talking to a broker? Because I could Google my address and then it says low, medium, high. How do we know? Especially if you haven't bought the property recently. Yeah. I mean, if you speak to a bank or a broker, they do have the tools, I guess, too. There's tools that we can jump online and have a better indication, like more of a, you know, within a $100,000 range, I guess. Or we can actually do

Starting point is 00:09:40 valuation which is either an online valuation depending on how much data we have to say that there's been recent sales in the area or if we need to get someone out there and actually value the property in person because there's been works completed recently we need a true and correct value then we can do that too. That's what we did so we knew that we didn't what it's called a desktop evaluation and when I was going back and refinancing our mortgages and thinking about okay what do we want to do in the future? I want to know my house value. I specifically requested an in-person valuation because if you Google the house that we had, so everybody knows we've just sold it or sold it last year. I knew that the information online was not reflective of the

Starting point is 00:10:22 property that we'd created. So I was like, we've done this really cool renovation. Like we've actually tipped a couple of hundred grand into this and it like, I think it looks slick. I need someone to come and look at all of this so that we can get an accurate reflection. And in some cases it might cost you money, but in most cases, if you're thinking about going through that process of getting equity, Jack, if you order that, that's free. Correct. So like through your broker, they can organize it most of the time free. It will depend on like your circumstances and like sometimes location and whatnot. But I'd say 99% of our clients get that valuation done for free. Yes. What things actually influence a lender valuation? So obviously like if you've

Starting point is 00:11:04 renovated your house significantly, like I did, and by the way, we got a better valuation and I was stoked. I was like, that was worth it. Yeah, exactly. But what other things actually influence that? Things that will influence is obviously how many comparable sales that the bank has got in the area versus, you know, a more rural property. Is there less on the market? When was the last one sold that type of thing is going to have a big influence on if they can just do a straightforward like you said online valuation or a desktop valuation versus if they actually need to go out in person so that can have a pull on what the bank sort of like I say spits back as a first valuation of the property but we can always sort of push back on that if we don't think that that's

Starting point is 00:11:46 accurate enough and like you said if we need to get someone out there we will. Yeah and we've done it before and I don't want to set this expectation too high, but for clarity's sake, we've gotten a bank valuation back from a property that we weren't happy with. And yeah, we could get them to go back out and revalue it, but we've also gone to other banks before to be like, don't really like your valuation. Don't believe it. Our neighbors literally sold for $250,000 more and we have the same townhouse. Why? That feels like you didn't take that into consideration. We're just going to go get a different bank valuation. We do see that quite often. So just because you get one valuation back with one bank, that's not the end of it, I guess. We've definitely had where

Starting point is 00:12:25 we've gone to another bank or two to three other banks, I guess, and completed valuations. And we have seen valuations come in even $150,000 more than the other one. So get a good broker who's actually going to put the effort in as well. Because some brokers will be like, well, sorry, Jacqueline, that's just what your vowel came back as because they're not willing to not shop it around, but get a second opinion. And like, you want a broker, like, and this is obviously, I'm so biased because I obviously love Zella and I love the team. And I think that we do a really good job, but you want a broker that is on your team. Like if you've said to your broker, look, I really want to do this rental and it's 250 grand. And then, you know, the vowels come back

Starting point is 00:13:05 and told you that you probably can borrow 180. Like a lot of brokers will be like, well, that's just what you can borrow. Whereas we'll be like, nah, I reckon we could get another valuation that would tip it over and like work out what goes on here and here, like becomes like a game to us. It is. Like, and I don't, I mean that in the most professional sense, but sorry, there's a, like there's, it's like a game. You've just told me that it's worth this. And like, you know, if I genuinely believe it's more or I've done, we're not silly. We work with property every day. Like again, if you saw your neighbor sell for more or like three townhouses that you think have similar specs have gone 50 grand over that. I want a second opinion. It's like a doctor.

Starting point is 00:13:46 It's more work, but it's going to get us the outcome that we want. And I want my clients to be like, yeah, Jack was the best or working at Zella was the best. Yeah, because we tried really hard for that reputation. Not going to lie. So Jack, let's go back to that $900,000 example. Let's say I have a house and I reckon it's worth about 900 grand and on my loan, there's $500,000 still sitting there. If I came to you, Adzela, what are the things that you are going to look at to see if I can actually borrow the equity? What are you going to go through? How's that conversation going to go? Yeah. So, we're going to obviously look at what the property value roughly is. And like you said, we're not stuck with one lender.

Starting point is 00:14:26 We can look at multiple lenders and see what they come back with, but we're going to see as a rough amount how much equity you do have. If you're one of our BDMs and you're listening to this episode because you're like, wow, Zella is on an episode, just turn it off and pretend that you never heard that we would shop it around. We would not do that to you guys. We are loyal. You are our one and only. One and only. We would never play you off against each other. That would just be kind of low-key rude and in the best interest of the client. Yeah. But we're going to look at obviously equity as a number one. We're going to see which different banks are going to allow us to go up to which type of LVR. So, some banks are going to have us cut it off at 70% LVR, some will be at

Starting point is 00:15:04 80% and some will allow us to go above 80%, but we're now in LMI space. So, lender's mortgage insurance, how much is that going to look like if we do go above 80%? And also the third one, obviously borrowing capacity. So, we need to make sure that what we're looking to take out, that we can actually service that and what that looks like. Yeah. And the bank's also going to be like, hey, Jack, why do you want to access your money and assess that as well. And I think that sometimes it sounds really, really cool. And I just want to dispel this for a hot second. Cause like, I mean, we're in the middle of a cost of living crisis. So everyone's trying to work out how to get more money, what that looks like. You know,

Starting point is 00:15:40 we just need a little bit of like wiggle room and you might go, we could probably use the equity, but we might assess your incomes right now. And unfortunately you can't access that equity because you can't pay back the additional loan because you're already living like paycheck to paycheck in a way and I find that really disheartening for the client yeah so like talk to us still because we want to make a plan and like every single like Zella broker is going to make sure that you have a budget and you have a cash flow and you do all of that stuff but I think also to set clean expectations you can't just pull it out and be like oh this is wiggle room yeah especially if you're already strapped for cash because your loan is going to increase

Starting point is 00:16:17 and they might go well on your incomes you can't pay back reasonably and therefore no yeah and that can be really disappointing if you've kind of unlocked that idea in your head and been like this is the thing that's going to give us some breathing room same as changing employer yeah so obviously you might have equity available you want to pull it out if you've changed employer where you've gone to say maybe casual you might need to stay at that job for six months before you can access it doesn't just mean that because you are currently employed that you have the ability to pull out that equity. Yeah. Now you've worked for Zella for years and we're really lucky. We have thousands of clients and I would say that you've seen thousands

Starting point is 00:16:56 of applications go through. What things make you go, this is going to be an issue when you see it pop up? Going back to, I guess, employment type, starting LVR. So where you're already currently at and where you're trying to get to. Recently left your employer. So recently quit or again, looking for new employment. I would say maternity leave. I think a lot of people, and this is not a bad thing, but I think a lot of people are like, well, I'm on mat leave. I still have an income. I still have solid employment. That's not how banks see it. No. And we're not saying that that's fair. That's just the game that we're playing. If you're on maternity leave, very often we have to say, let's wait until you're back in your job and then we can work it out because the banks are

Starting point is 00:17:38 very conservative. It makes me very frustrated, but the banks are very conservative about it. Yeah. It's not a cold hard no. No. It's just obviously a little bit trickier. Yeah. And it definitely limits options, I would say. Say you and I are looking at my loan and we can access equity. That looks really good. But I've got $40,000 worth of personal consumer debt. Can I just roll that into my home loan? I feel like that's a common question. You certainly can. But again, you need to speak to your bank or broker if that's going to be beneficial to you and how that's going to look. There is two types of ways to structure it. You can obviously add that consumer debt directly onto your existing home loan, make it one repayment.

Starting point is 00:18:19 That could be for the timeframe of say 30 years, your existing loan, keeping down repayments. And you might be happy with that. I'm not happy with that. Yeah. You're also paying interest over 30 years on that portion as well. It's going to be more expensive. So you think you're lowering your interest rate, but you're increasing your time paying that back, which means it's probably going to be more expensive. Yeah. Another option that you can look at is doing, say, a split for that $40,000 over, say, a much smaller loan term, say, seven years. And that interest rate's obviously less than what you were already paying, maybe at 15% for a personal loan, because now it's on a home loan rate, but therefore you're still paying it back within a time. The same period of time.

Starting point is 00:18:56 Yeah. Just because you pick one way does not mean that you're stuck in that structure forever. you might say adding the consumer debt to the home loan and making it one repayment and the smallest amount of repayments today is the best for me just to keep my repayments down. And then when things change in a year's time and you've got more cash flow, you might look at splitting off that portion and just trying to. Smashing it down.

Starting point is 00:19:20 Yeah, smashing it down and say five years and getting rid of it. It doesn't mean that you're stuck if you choose one way now. You can always chop and change it. You've just got to reach out. And you don't have to work that out yourself. Your broker can give you a plan for that, by the way. It's not, you have to come, we can just facilitate that. No, we'll give you the plan of getting out of debt because one of the things that I would say a good broker does is flag things that are

Starting point is 00:19:42 not going to be in your best interest long-term. So, you might go, well, my home loan interest rate is sitting at 5%. I'd prefer that than my 15% personal loan rate. Jacqueline's going to sit down and be like, yes, but over 30 years, this is what this looks like, but we can still do it if you made additional contributions to your mortgage still at that 15% rate. We could probably get rid of it in like two years instead of the five that you still had left on that personal term. And then also we could use that money to consistently contribute to it after it's gone and get down your mortgage. Exactly. Pay less interest over. Pay less interest. And that's really sexy. So there's lots of strategy that we can give you,

Starting point is 00:20:19 but you kind of need to start the conversation. Jack, going back to lenders, when they look at equity usage. They're kind of really reading into like risk signs and going, is this risky? Because like they're more likely to go, oh, she wants to borrow a hundred grand to put another bedroom on the back of the house. Yes. That's pretty sexy. That's going to add value to the property that we're already financing. Yeah. Green flag. That sounds really good. Victoria Devine wants to buy a boat and call it boating my boat face. That's probably a lot more risky. Is that going to hold its value over time? What's it going to cost her? Why is she going to do it? They're probably going to look into in the background, just like, okay, well, she'll have boat maintenance fees. What

Starting point is 00:21:04 does that look like? There's lots of weird questions that you might not have thought of. Yeah. Do you see that some lenders are more conservative on letting you have equity than others? Maybe others are more flexible? Definitely. Like, so I could get boat face, but it might not be the most conservative bank. You can, but you're right. Not every lender is probably going to allow you to do that. And like I was saying before, there are different LVR restrictions with different lenders. So some might allow you to only go up to 70% because that's where they draw the line and say it's less risk adverse. The most common, sorry, would be 80%. And then again, in some cases,

Starting point is 00:21:40 they'll allow you to go above 80%, I guess, for the right reasons. In that case, Bodie McBoatface, above an 80% LVR is probably going to be really hard to get across the line. that's really disappointing all right to deal with my disappointment I think that we should take a really quick break and when we get back I want to get into things that you need to think about before you're actually using your equity so guys don't go anywhere we are talking about absolutely everything equity today with Jacqueline Jack who does using equity tend to work really well for bridging clients bridging clients Tell me more.

Starting point is 00:22:17 So I guess if you were talking to an elderly couple and they were looking to downsize their property, they're going to use the equity in their existing property to purchase a new property and then sell the other property. Same goes for, I guess, a young couple with a family. Yeah. They might just want to move straight from A to B and not move from one property to a rental back to the new purchase. So if you've got a lot of equity, bridging is an option.

Starting point is 00:22:42 Yeah. Is that the same as bridging finance though? Yes. So that's exactly what bridging finance is. Correct. Use it. Yeah. No, but I think it's really important to clarify that too, because I think a lot of people think bridging finance is this very, very separate loan that you go and get, which it can be. We can go and get additional finance to make it up if you don't have equity in a property that you are purchasing today with the promise that you will sell your property to extinguish that loan. But that's kind of where it can be not so risk averse. So, like there are bridging products and these bridging products are

Starting point is 00:23:17 usually more expensive, but this is a way of doing it at your current interest rate. Correct. But you would need to have quite a lot of equity to be able to do that because most banks- Are you saying old people? I mean, old people do have equity. They've had more time to pay off their property. Well, generally speaking, yes. They've either sat on their property for some time and the property values have gone up or they have made a lot of additional repayments over that time. So if your parents want to do this, you send them to us because we really like those loans. Yeah. They're really easy. They're really fun. Your mom's probably really fun as well. Like send them to

Starting point is 00:23:50 Zella. We'll have a cup of tea. We make great tea. We do. We drink a lot of tea in our office. On the flip side, who doesn't it work for? I guess someone that's teetering on the edge of a high LVR already. And like I said, because some people can go over that 80%, some people have come to us before and thought, I would like to debt consolidate and look at adding the existing loan, pay that off and add it to my mortgage. But that's pushing them over an 80% LVR, which is adding lender's mortgage insurance, which is also pushing up their interest rate. So when taking into account the fees, the charges and all of that as a whole, it's not beneficial for them to be looking at doing something like that.

Starting point is 00:24:31 Yeah. One of the things that I often talk about and like not necessarily on the podcast, but just in general is I hate, and I can be a little bit more aggressive because you won't see me as your broker. You get jacked. She's much nicer. But I hate that people sometimes use equity to manage their lifestyle creep because I feel like it just slips through your fingers. Like if you're like, oh, well, we'll just release some equity and we'll be fine later. Go on this holiday. We'll upgrade our cars. We'll do this. Like the money doesn't last. And then you need to find a way to keep up with the lifestyle that you've just built again with releasing equity. Like that's not a cycle you can keep up with. That's a cycle of you going into more and more debt or not getting

Starting point is 00:25:08 ahead when it comes to wealth creation. And your property value can dip over time as well. Yeah. So that's something that you need to be mindful of too, just because you could go up to these LVRs and take out additional funds for whatever reason. If your property value did decrease over time, what does that look like? Are you going to end up selling and not making a dime of that property? Do you sell Bodie McBoatface? I know that's the last thing we want to do. No, but like it can be. And I think that that's where people go, well, I'll just sell it. And it's like, well, that's a decreasing asset. Like that's not going to be worth the same as what it was before. So even if later down the line, you're like, oh, well, we'll sell the boat and put that back in

Starting point is 00:25:43 the mortgage. You're not going to be at the position that you were before. Correct. So I think that's really important to take into consideration. That's why I said, you're not going to like me. It's a bit blunt. Don't use it for lifestyle. Yeah. Do you ever tell clients that they shouldn't use equity are you as blunt as me do you go you shouldn't be doing this or even if they technically can yes but that's because I'm providing them with the facts as to why they shouldn't and yeah I'll give you options I'll let you have a look over and then I'll sort of give my recommendation as to why but again like you said before it's it's completely up to the client if they want to proceed with that or not but yeah and I think that we talk about

Starting point is 00:26:20 this a lot in the office because we've got such a beautiful and diverse client range like we do do people who are downsizing. We do do first home buyers. We do do people who are accessing equity to pay down debt. Like we do all of these things, but sometimes when there's a like, ah, V, like let's chat this through. I'm about to have a conversation with a client where I'm going to tell them that I don't think their idea is a good idea. And it's always like, we'll tell them. Like, I think our business is very pro, just be honest, be kind, but be honest because I would prefer the client to be in a better position and go, you know what, Jack, you're right don't write the loan and they walk away and we make no money that feels like a better

Starting point is 00:26:58 ethical position to be in yeah than oh yeah well yeah maybe you shouldn't but like the loan will go through and it'll be easy just to get no pay every time we've given feedback as to why that they shouldn't i feel like the clients have always been really thankful and understanding actually listen to us i don't think it's a case of just like oh well i'm gonna do it anyway i'm gonna go to another lender like no they're just like oh you're right i haven't really yeah and it does make us feel a little bit bad when we have to have a hard conversation no one wants to have a hard conversation we're willing to do it but no one wants to do it so what questions should someone ask themselves before they're going to use their equity so i've decided yep i can

Starting point is 00:27:38 maybe i've already spoken to you and you're like yeah v you can actually access a hundred thousand dollars worth of equity what am i asking myself before going yeah let's pull the trigger on that Yeah. I mean, is it going to be beneficial? Yeah, because Bodie McBoatface. No? Okay. Yeah. Is it going to be beneficial, I guess, for the future? How much equity do I have? What happens if the property value drops? What does that look like? What's my exit strategy? If we're purchasing a new investment, are we looking at the risks for that as well? Like you said that the different lenders are going to look into different things. So if we did say that we are going to be purchasing using the deposit to purchase a new investment property, there are

Starting point is 00:28:19 additional expenses that need to be captured. So, therefore, it can reduce your borrowing again. Yeah, because we're looking at stamp duty and you're not going to get the concessions that you got when you were a first home buyer. Yeah. I mean, it's also going to restrict your future borrowings as well. So, you're taking on more debt. Therefore, it's going to limit what you can do in the future too. So, if you had a plan of purchasing that property in five years time, is taking out $100,000 for Bodie McBoatface the best option right now? Yes, it is. Thank you for making me question it. I'm doubling down. But I do think that that's really important because I laugh about Bodie McBoatface, but it's like, that's a lifestyle

Starting point is 00:28:56 decision. And I think that that trivializes it in a way that you go, well, that would be silly, Victoria. And I go, well, yes, that's why I'm saying it in a silly way, because I don't want you to be funding your lifestyle through equity that could, if you've got access to 100 grand, that's power. Yeah. Like that is, you could do some really cool stuff. You could build a share portfolio. You could put an extension on the house and, you know, add value that way, buy an investment property. Like there are so many cool things you can do with equity that I just get a little bit like, no, what are you doing when people cash it out for reasons that I go, that's not going to help future you. I also think if you're going to like, what else should you be

Starting point is 00:29:37 looking at, if you in your head are like, well, we're going to do an extension, have you actually gone and gotten quotes? Like if you in your head are like, oh, well, a hundred grand should be enough to cover that. In this economy, nothing is promised. So like go get quotes from builders. What would it cost to put this on? Or if you're renovating the kitchen or the bathroom or whatever, go get at least three comparable quotes so that you know on average what it's going to cost. Because I feel like building at the moment is absolutely blowing out. Like most of our clients who are building, it's stressful because they keep coming back and being like, oh, we've gone over 10%. Like, or we, you know, we, we didn't realize that this wasn't factored in or our

Starting point is 00:30:15 builders come back and said, this material is actually more expensive because we didn't get in on the cutoff and the price increase. It's actually chaos. And you're laughing because I know you've just gone through this personally with a Renault. I went through it with my Renault and like never again. So it can be really stressful. Are there any other smart ways that you've seen people use their equity apart from like investing? I'd say the biggest one would be purchasing an investment property, like using the funds for a deposit to eliminate the need for lender's mortgage insurance on the other side. I guess cashflow is tightened up and therefore majority of people's funds is going towards the mortgage and reducing the current home loan. So a lot of

Starting point is 00:30:54 people don't tend to have a large savings just sitting in their accounts right now. It's all tied up in equity. We've talked about the risks of equity, obviously, like you're not being able to afford it, your cashflow, you know, being a little bit more snug, whatever, even property going down in value and you're going, excuse me, that's not what I expected. Have you ever seen something go really wrong with an equity release? I just want to scare the community just a little bit. Well, yeah. Obviously the property value dropping below what they've purchased. Therefore, you know, if you were at a 90% LVR and the property dropped, you know, by 10% and therefore you looked at selling, you actually need to make additional repayments to the bank to pay back that

Starting point is 00:31:37 property. Yeah. You don't actually extinguish all the debt by getting rid of it. Yeah. You could end up with, like I say, a $40,000 or $50,000 additional loan, even when the property's gone and you've sold and you're still having to make repayments back on it. So, you do need to be really careful about sort of how much you're taking out and what the use is for. Yeah. And that's why even if you went to your bank originally and got your first home loan and it was all hunky-dory and it went really well, fantastic. That's why if you're thinking about an equity release, please just talk to a broker. One, to get the right situation, but so that they can do the strategy because the bank isn't going to look at your personal circumstances and be like,

Starting point is 00:32:14 so are you planning on kids soon? What's your life plan? You've got any big events coming up, any holiday? They don't give two flying ducks. What they care about is, can you afford it? They'll run the numbers and be like, yeah, we'll release that out. No worries. You'll probably have a drop-down menu of why you want the equity to be released. There is. Oh, you've done this before. Maybe I've had a play with it. But there's a drop-down menu of why you would want to release your equity. You pick one and they'll be like, yeah, sweet, no worries. Like they don't even care. People even get equity out and lie to the bank. I'm not saying this is a good idea, but they might be like, it's for renovation. Then all of a sudden they've spent it on

Starting point is 00:32:46 boating boat face. Like that happens because once the equity is released, it just goes into your bank account. Like it's actual cash you've got access to. And so for me, that's a risk as well, not having a solid plan for your equity once it hits your account. Like one of the things that I would say is if you are accessing equity and you're not, you know, using it for a home deposit or something immediate, make sure it goes into your offset account immediately. Immediately. Yeah. So, it just sits there. The day of funding. The day you get your funding, that money goes straight into your offset account and sits there and it will sit there for the entire time that you're doing your renovations and drawing down on it. Don't

Starting point is 00:33:23 have it go into a separate savings account. Like at least offset the interest on your mortgage for the time being. Because like if you're renovating, it might be like, who knows, I'm making this like schedule up, right? It might be like 20% upfront to get the builders and then you get to 50% and you're not even paying the rest of it off until 2027 and that's fine. But sorry, that money should be working for you while it's in your hands because you can't invest it in the short term. Like that's not an option. I feel like that's a good little situation to be in, but then also be really open with your broker about your life and your circumstances and what's going on. Because one thing that we've said, or a couple of things actually that come to mind

Starting point is 00:34:04 is if you're planning on changing jobs soon and you go, no, it's fine. Like I'm getting a promotion. Like in theory, that sounds really good, but banks don't like job change. So like, even if you come to me or come to us and say, hey, I want equity. And we're halfway through the application and then you call us and you're just getting an update on your loan application process or whatever. And then you go, oh, Jack, by the way, oh my God, I got a new job. Like you would think that as a beautiful client, we're so excited for you. That is alarm bells to us. That is terrifying. Is it not, Jack? Yeah. Your mind's already gone elsewhere. It's like, how can I fix this? Yeah. Yeah. Because some banks will then be like, yeah, you were

Starting point is 00:34:43 pre-approved. You were accessible for that, but now you've got this new job. You need to get through probation on your new job before we're willing to give you access to that cash and they might cancel the thing completely. Correct. And we have to update the bank on that. We can't be deceptive. And another one is people are like, should I be using my equity now for like a reno before we have kids? I was about to say this one. I was about to say you need to, yeah. So what's the answer there? Should we be releasing our equity before we have kids and doing the reno now? Or do we just wait until we have kids and then release the equity? I mean, obviously you can do it either way however if you're going to take the equity out now and then you're going on

Starting point is 00:35:18 maternity leave you need to make sure that you've already factored into account this extra borrowing and extra payments that are going to be coming out because just because you're borrowing it now and then you're going on maternity leave your payments don't stop so you need to make sure you've taken that into account your cash flow is so important yeah isn't it funny you're like process and structure and driven and i'm like cash flow budget money cash flow cash flow I'm just a broken record at this point. Anyway, I feel like we have clocked what it means to use your equity, access your equity, what equity means. We have so many educational posts when it comes to like information about mortgages and information about equity, etc. on our Zella

Starting point is 00:35:57 journey Instagram. So, we'll make sure that all of that is linked below and I'll also be really brazen and just put the link so that you can book with one of our Zella brokers should you want to do that in the show notes as well. Jack, thank you for being on the show again. I know this is one of the topics that gets talked about a lot in our community and I know that they love it when you're on the show. So I married them together. You guys are so very welcome. And if you're thinking about your own situation and you want to understand all of your options, obviously I've put all of Jack's links and my links and the Zella links in the show notes. And if this has helped demystify equity for you, please make sure you share it with someone who keeps saying that they

Starting point is 00:36:33 might use their equity one day. And of course, hit subscribe so that you don't miss an episode. And guys, we will see you, not Jack, but we will see the rest of you on Friday for Friday Drinks. Bye. Bye. The advice shared on She's on the Money is general in nature and does not consider your individual circumstances. She's on the Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs. Victoria Devine and She's On The Money are authorised representatives of Money

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She's On The Money - Equity Explained: Is It Really the Shortcut to Getting Rich?

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