It’s so easy to take risks when you have very little to lose. However, when you’ve worked hard and accumulated a few resources you can stop yourself from growing even bigger because you’re too scared of losing the little that you have.
I am going to stop talking in parables and cut straight through to the point with an example from my own life.
When I started working at Goldman Sachs in 2005 I was in the awesome position of having no debt although I also had no money. By the time my first pay cheque arrived there was less than £100 in my bank account.
That year, I saved like crazy and by the end of my first year workingI was able to buy my very first property.
Fast forward six years to 2012 and the property value had shot up to over £500,000 so I was sitting on a fair amount of equity especially as the debt had been paid down to about £210,000. To be quite honest, it made me feel rather wealthy and I didn’t want to lose it. I had by now rented out the property and the tenant was effectively paying down my mortgage very nicely.
My mortgage interest rate was enviably low and monthly rental were MUCH higher; a very comfortable position to be in.
In early 2013 I realized I would need money to fund a project and getting a bank loan as a solopreneur in Great Britain is extremely difficult. My only options were to release equity in my home or in my first house.
In early 2014 an estate agent told me they could easily sell my house for £575-600k. I loved the idea but selling was not an option at all as too much of the money would be eaten by taxes. When you have equity the most efficient way to release it is with a loan. You don’t have to incur the taxes.
I avoided making the decision but by late 2012 property prices seemed to have slipped to about £525-550k. That was my wake up call. I made a major realization:
If you sit on equity, especially equity trapped in a property, it could be there one day and gone the next. The most financially astute decision is to release it and re-invest in something else. Once you get the extra money via a re-mortgage that equity becomes real money that you can use and grow.
The low interest rate made me want to keep the mortgage I had but that’s not a good enough reason because rental income is subject to taxation anyway.
It isn’t always possible to get the mortgage you want but I learnt three key lessons:
Do you think releasing equity from property and other wealth is crucial to building more wealth?
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Heather on Wealth
I enjoy helping people think through their personal finances and blog about that here. Join my personal finance community at The Money Spot™.