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Misusing equity

Misusing equity

January 22, 2018

As an asset finance specialist, I get pleasantly challenged everyday with questions like: why would I use you instead of my mortgage broker? Why would I use you when the dealership charges me 1% interest? Why wouldn’t I just extract equity from my home to buy plant & equipment? How are no exit fees possible? Other brokers are charging less interest than you? And so the challenge goes....

Today I’m going to write about misusing equity.

Equity is the difference between the value of an asset (our home) and the cost of the liabilities of something owned (mortgage against our home).

For example, if you purchased a home for $500,000 plus stamp duty and it is now worth $650,000, then you have equity of $150,000 sitting against your home. Or if you purchased a home worth $500,000 and over several years you have worked hard and paid off $250,000, then you have $250,000 worth of equity in your home.

Equity can eventuate from a number of things such as capital growth, principle repayments or high initial deposits made when purchasing a home. Majority of equity is incurred from capital growth or long years working hard and making extra repayments.

So when a prospect challenged me during an early morning coffee catch up with “why shouldn’t I use equity against my personal home to buy an excavator for my business?”, the penny dropped and I then realised that this was a potential issue I had to clear up.

“You see, when you take finance out for any type of plant, equipment or vehicle for that matter the actual subject asset should be used as security for the finance.”

“An encumbrance is applied to that asset only, identifying the vested interest other parties have with that vehicle.”

“So if the lender reposes the asset, they would then sell it for the highest value to recuperate the liability against the asset.”

“However, if you refinance to release equity from your personal home to buy a work related asset and the asset is reposed, then unfortunately you are still required to pay the debt incurred (equity released).”

“This could be over a 30-year period which is traditionally the normal term of a home loan.”

“Paying for an asset you no longer poses seems ludicrous to me” I then concluded to say to my client.

“This is a very basic explanation of the detriment taking out the wrong finance can make, for further information let’s make an appointment in the next couple of weeks once you have a few quotes so I can elaborate.”

Guess who bought me breakfast that morning?

If you have any questions, queries or concerns regarding my expression, please contact us!