Using your equity is the real key to racing towards mortgage freedom.
If you have a property worth $500,000 on which you owe $150,000, you have equity of $350,000.
Lenders will allow you to borrow using your equity as collateral. Most lenders will allow you to borrow as much as 90% of the loan-to-value ratio (LVR) of your available equity (although I don’t recommend being nearly this aggressive).
If you are careful, you can use this equity to your advantage to pay off your home loan sooner. Larger expenses, such as cars and holidays that would have been paid by credit card, are less costly on the lower rate of your home loan. So you can use your equity to reduce your other, more expensive debt – and then use the overall savings to accelerate your home loan.
Most loans allow you to consolidate (re-finance) all of your debt under the umbrella of your home loan. This means that instead of paying 1520% on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at a fraction of that cost.
As always, any extra repayments or lump sums will benefit you in the long run.
However, as I’ve spoken about already, please don’t fall into the trap of consolidating your debt into your home loan and then incurring more debt on your newly paid out credit cards. It is usually worthwhile to bring all your debt to its lowest possible interest cost, but doing it over and over again will cost you dearly in the long run.
When you pay your debt down faster you can now use your growing equity to start switching your bad debt to good debt. Simply stated—bad debt costs you money, while good debt makes you money. The key to financial freedom is understanding this and applying it to your life. When all your debt is good debt, life is much easier and financially more secure.
To be clear, we are not financial advisors. We hold an Australian Credit Licence, which allows me to help people compare and choose loans. But we can explain the general concepts and difference between ‘Good and Bad Debt’ and let you draw your own conclusions. I also suggest you seek financial advice specific to your situation from a licensed advisor.