What is equity?
Simply put, equity is the amount that you can sell your home for minus the balance owing on your home loan.
For example, if the current market value of your property is $800,000 and you owe $420,000 on your home loan, then your equity is equal to $380,000. Another way of looking at it is that equity is the value in your home that you currently own.
What is usable equity?
It’s important to note that lenders will usually only allow you to unlock up to 80% of your existing home equity. So, using the above example, if your equity is $380,000 then you may be able to access up to 80% of that which is $304,000.
Different lenders are also likely to have some conditions around assessing your borrowing capacity and how you can comfortably make repayments as you are effectively increasing your debt by taking out a home equity loan. They will also likely need to know the reason why you are accessing the equity (what are you using it for) to ensure that it is being used responsibly.
How can I use my equity?
The most common reason people access their equity is to use it as a deposit for their next home or an investment property.
Other ways that you can use your equity include:
- Renovating your current home
- Consolidating your other debts
- Covering major expenses like medical bills or education
- Investing in the sharemarket
- Funding a lifestyle expense such as a holiday or a new car.
How can I increase my equity?
The most obvious way to increase your equity is to make extra repayments on your loan. As you reduce your outstanding loan amount and, theoretically, your property value increases over time you will naturally increase your equity.
If maximising your equity over a set period of time is one of your main objectives, you should take that into consideration when applying for your home loan or refinance as it will impact the type of loan product that will be the most suitable for you and allow you to achieve that more easily. It’s important to note that some loans don’t allow for extra repayments or will cap the amount of additional repayments that can be made over the term of the loan. This is especially a consideration for fixed rate loans.
Another way you can increase your equity is by completing renovations or improvements to increase the value of your home. You can also use the equity to fund the renovations and in turn increase the equity, thereby using it in a cyclical and strategic way.
Things to consider
When you refinance your home loan to access equity, you are basically increasing your debt which could lead to increased repayments or a longer loan term – or both. This means you might end up paying more interest in the long run.
You should also think through the pros and cons of each situation and how the equity can be used strategically. E.g. if you’re consolidating debt could you save more in the long term but focusing on paying this down individually and save on the cumulative interest vs is the interest rate of the home loan lower than the other loans and therefore a strategic saving.
There may also be some fees and charges associated with home equity loans, so it’s a great idea to utilise a mortgage broker who can help you select a suitable loan with the most competitive terms.
If you’d like to discuss your options, please get in touch with us today to arrange an appointment.
All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.
