Equity is the difference between the value of your property and how much you owe on it. Find out how unlocking the equity in your home could open up opportunities.
What is home equity?
As a homeowner, you build up equity in your home over time, when you pay down your home loan and if the value of your property grows.
How much equity do I have in my home?
The amount of equity you have in your home is the difference between the value of your property and the amount owing on your home loan. For example, if your property is worth $750,000 and you have $250,000 owing on your home loan, then you could have up to $500,000 in equity.
How can I use the equity in my property?
Depending on your income, living expenses and how much you owe on your home loan, your lender might let you borrow additional funds, using your home as security. You should seek advice from your financial adviser and registered tax agent before making a decision whether to do that.
Most home loans will fund up to 85-95% of the value of your home. However, if you have less than 20% equity, it’s likely you’ll have to pay Lenders Mortgage Insurance (LMI).
If you have a home loan, have built up equity and are able to make the repayments, you may be able to borrow against your equity in the following two ways.
- Apply for a supplementary loan
- Refinance your current home loan
You could refinance your current home loan to access your equity. Talk to your DFS Broker about how you may be able to take advantage of your equity.
Examples of using equity
Some common uses of home equity are:
- Investing in property
Unlocking the equity in your home could be an option if you are thinking about purchasing an investment property, as it could help with a deposit for that purchase. Investors may be able to negatively gear their property investments depending on their personal circumstances.
- Renovating your home
Renovating your home can not only make it more suitable for your needs, it can potentially also increase the value of your property. Accessing your equity could help make your renovation plans possible.
- Investing in shares or other investment products
Some people use the equity in their property in an attempt to help them grow their wealth. You could use your equity to invest in the share market, buy bonds or buy into a managed fund. As with any investment, there are risks involved (for example, the value of your shares or managed fund holding could go down, not up) and there is an increased risk when you borrow to invest, so you should obtain financial and tax advice before you commit to engaging in such a strategy.
How does equity work when buying a second home?
When you purchased your first home, it’s likely you saved a sizeable deposit. Now that you already own your first home, any equity that you’ve built up in that property could be put towards the deposit on your next home. This means you could potentially buy your second home with little or no cash deposit depending on your circumstances.
Depending on your income, living expenses and how much you owe on your home loan, you might be able to refinance or apply for a supplementary loan, using your home as security. However, you should understand that the more you borrow against the value of your home, the higher your repayments are likely to be. This also means you could be at greater risk of losing your home if you cannot meet those repayments.
How to build equity in your home
There are two main ways to build equity in your home.
- Reduce how much you owe the bank
As equity is the difference between the value of your home and how much you owe on it, the less you owe on your home loan, the more equity you will likely have.
Pay off your home loan faster with these tips:
Save on interest payable with an offset account
Repay principal and interest
Make extra payments
Consider setting up more frequent repayments
- Increase the value of your home
If you’ve owned your home for a number of years, the value of your property may have increased over time. Besides owning your property long enough to potentially enjoy capital growth, renovating and improving your home may add to the value of your property.
What to consider when using your equity
The more you borrow against the value of your home, the higher your repayments are likely to be. This also means you could be at greater risk of losing your home if you cannot meet those repayments.
Before you borrow against your equity, it’s worth considering whether:
- the term of your loan will be extended
- you’ll be able to make repayments if interest rates rise; and
- you have sufficient funds outside of home equity for emergencies.
Speak with your Denistone Financial Services Broker regarding what equity you may have available against your home loan.