For many, the primary residence is regarded as the largest debt they will ever have, and, to a certain extent, this is true. But, unlike other more traditional debt, such as a car loan or a bank overdraft, a property can serve as a means to reduce overall debt, including its own mortgage.
A house is a debt reduction tool but only if structured correctly.
Within the various elements of a residential home and its associated debt, are components which can be manipulated to the betterment of the homeowner. Of course, the initial structuring is important and keeping a close eye on how that structure can be improved over time – including knowing when your fixed interest loan comes up for renewal – is an obvious way to ensure your mortgage financing is in the best possible shape. Beyond that, there is the house itself which will increase and decrease in value in line with market variables. Of course, most of us have experienced considerable increase in our property values over the last few years and if you have had your home for any significant period of time, it's likely you have a substantial amount of equity in your property.
Interestingly, most people don't put equity on their personal balance sheet, despite the fact that it has a significant – if unrealised – value. It is often considered to be potential money and therefore is doomed to exist in a void of its own. However, credit card facilities, even those which aren't used, are still deemed to be actual debt.
By moving equity into the balance sheet, you can begin considering how you actually use it, if at all. Have you borrowed or guaranteed a loan with your equity? If not, then you have what is quite possibly a significant amount of money just sitting there doing nothing – and it is this money that you can use to assist in the reduction of your existing debt.
By adding your equity to your balance sheet, you have transferred it to being an underused resource. This can be rectified by borrowing against it in the form of an investment loan and using that money in short and medium-term investments with a view to reducing overall debt. Of course, borrowing against the equity in your home doesn't directly impact the value of the property, so any further gains will also be added to the equity. Using the strategy, over a period of time, a savvy homeowner can have not only a robust debt reduction and removal strategy in place, but also a solid investment strategy for the long-term. Meaning, once the mortgage has been paid off, the investment strategy remains and any revenues received from that are still owned by the investor.
Of course, all investments come with an element of risk. But by leaving equity in a property, you are allowing it to serve no purpose at all. Any other investments you have that are funded by physical income, are potentially wasteful by comparison, in that you have a latent resource available, earning 0% interest, which works just as well as physical money.