Home equity: the golden ticket
Those who have read Charlie and the Chocolate Factory will remember the golden tickets. In this wonderful book by Roald Dahl, the golden ticket was found in a bar of chocolate and represented the opportunity for five lucky people (in the book they were all children) to tour Willy Wonka’s chocolate factory. In life there are plenty of symbols and promises that could represent your golden ticket. A lot of them are nothing more than that — simply promises. However, there is one strategy that does represent your greatest opportunity to create financial freedom that I refer to as your golden ticket: it’s using the equity you have in your home.
WHAT IS EQUITY?
Let me first explain what I mean by ‘equity’ before we look at why it can be a golden ticket.
Simply put, equity is the difference between what the property you live in (your home) is valued at and the amount that you owe on the property. As an example, if your property is valued at $1,500,000 and you owe $500,000 on it, the equity in your property is $1,000,000.
In part II — Your Financial Freedom Gap — we considered why the house you live in is not an asset for the purposes of creating fi nancial freedom: it doesn’t provide you with income. To create fi nancial freedom, assets need to produce income. The problem is, most entrepreneurs think they don’t have the money to purchase assets to produce income. In chapter 9 about paying yourself fi rst we looked at investing a percentage of your income into assets on a regular basis. But is there a way you can kick start your journey and plan to create fi nancial freedom?
KICK STARTING YOUR JOURNEY
There is a way the property you live in can help to produce income and become a useful asset: you use the equity in your home to invest in income-producing assets. How do you do this? Earlier we looked at structuring your loans for success and creating a loan account for investing as well as an account for your mortgage. It’s these funds you borrow to purchase assets that can create income. You can use your house as security for the investment loan. Remember, banks love having security when lending money. Let me provide an example to illustrate why this can be your golden ticket. Sam is an entrepreneur who runs a successful business with two partners.
He owns a property with his wife Claire valued at $1,500,000 and has a mortgage of $500,000 (the figures I used above), therefore they have equity of $1,000,000 in their property. Sam and Claire purchased the property for $850,000 five years ago (not a bad increase in value) with a mortgage of $680,000 (they borrowed 80% of the house value). At the time, they structured their loan into two separate accounts. One was the mortgage account (the $650,000), the other was an account that they could redraw from ($30,000).
The amount they can redraw depends on how much they have repaid on their mortgage. If they paid their mortgage down to $500,000, they could redraw $150,000. They could draw out these funds and use them to purchase an asset that produces income.
Not bad.
But wait, there’s more … But, it can be so much better, and this is where it becomes your golden ticket. Remember when I said that banks love lending money when you have security? A property is a fantastic asset to have as security.
In Sam and Claire’s example, the bank originally gave them a loan of $650,000 on a house, plus an additional $30,000 secured against a house that was valued at $850,000. This is an 80% loan-to-value ratio. Quite high. But most banks in Australia will lend up to an 80% LVR without any issues or extra interest charges. But, as Sam and Claire have now paid their loan down to $500,000 and their house is now valued at $1,500,000, their loanto-value ratio is 33.33%. A lot lower. Sam and Claire could now go back to the bank and ask them to ‘refi nance’ their loan accounts. Sam and Claire have shown they are great savers (they paid $150,000 off their mortgage in fi ve years), and Sam’s business is paying him a solid salary and profi t. Their fi nancial planner tells them the bank will lend them up to 80% of the value of their property.
Therefore, as we can see in the next image, the bank will now lend them $1,200,000 in total — $500,000 of this money is already owed to the bank as the mortgage, so all up the new loan the bank will give them is $700,000. That’s $700,000 they can use to invest in assets that produce income. Deciding to be conservative, Sam and Claire agree to set up their accounts with the full loan amount (the full $700,000 of new money), but agree as part of their plan to only invest $500,000 at this stage. In this example they could have invested only the redraw amount ($150,000, the money they had paid off their mortgage), but in using their home equity they can now invest $500,000. And this still leaves another $200,000 available to redraw to buy more assets down the track, if they choose to. This is how you can use your home equity as the golden ticket you need to begin your financial forecast journey.
That all sounds great, but once you have the money, where and how do you invest it? There are some important lessons to learn about investing that you need to implement on your journey to financial freedom. Let’s take a look at these lessons now.

THE BOOK
Check out my new book, Freedom Assets: The Entrepreneurs Roadmap to Financial Freedom. It outlines the 3 Step process to creating your ideal life, freedom and time that allow you to have an impact on your community and creating a lasting legacy.
You can pre-order your copy now here
