Home Equity: What It Is and What You Can Do with It

Home equity refers to the portion of your home that you truly own. It is calculated by taking the current value of your home and subtracting any outstanding loan amounts. For example, if your home is valued at $800,000 and you owe $600,000 on your mortgage, your home equity would be $200,000. Generally, the usable equity is up to 80% of your properties value without lenders mortgage insurance. This means that if your home is valued at $800,000, you could access up to $640,000 in usable equity.

Home equity can increase over time due to two main factors: the appreciation of property values and the reduction of mortgage debt as you make repayments. In Australia, property values have generally seen a steady increase, making home equity an essential component of wealth accumulation for many homeowners.

Getting a top up with your existing Bank: Existing mortgage customers can approach their broker to increase their loan amount with the lender they currently bank with.

Refinancing your mortgage: Homeowners may choose to refinance their existing mortgage to access equity. This often involves taking out a new mortgage for a larger amount than your current one, using the difference to access funds.

To invest in Property: You may use your home equity as a deposit for an investment property. This allows you to build wealth through rental income and capital growth while also benefiting from tax advantages.

Renovations and Improvements: Using home equity for renovations can increase the value of your home, potentially leading to even more equity in the future. Improving your home can enhance your living experience and provide a return on investment when it comes time to sell.

Emergency Fund: Home equity can act as a financial safety net. In times of need, tapping into your equity can provide the necessary funds for unexpected expenses, medical bills, or job loss.

Debt consolidation: In the instance where we find ourselves making multiple payments on different credit facilities, we may decide to consolidate our debt into one easy repayment. This can ease cashflow and reduce interest rates if done correctly.

While leveraging home equity can provide numerous benefits, it’s essential to proceed with caution. Increasing your debt can be risky, particularly if property values decline or if you are unable to make repayments. Before accessing your home equity, consider the following:

Loan Terms: When refinancing or topping up your loan it is important to consider your current term verses your new term. Whilst refinancing may seem beneficial by allowing you to access equity for little to no change in your monthly repayment, extending your loan term may cost you more in interest in the long run and take you longer to own your home.

Market Conditions: Understand the property market trends in your area. A declining market can reduce your home’s value and your equity.

Financial Stability: Assess your financial situation to ensure you can comfortably manage additional debt.

Fees and Costs: Be aware of any fees associated with topping up your loan or refinancing, including valuation fees, legal costs, and lender fees.

Home equity is a valuable asset for homeowners, providing opportunities for investment, financial security, and home improvements. However, it is crucial to approach the decision to leverage equity with careful consideration of the associated risks and benefits. With the right strategy, home equity can be an excellent tool for building wealth and achieving financial goals.