If you’re a property owner, you may have some equity in your home. What does this mean? We explain by answering some key questions below.
What is home equity?
Home equity is the difference between how much your property or home is worth, and how much you have remaining on your home loan.
For example, if the current market value of your home is $600,000, and your home loan is $400,000, you have $200,000 in equity.
If you’ve been paying off your home loan, and particularly if properties have increased in value in your area, you will likely have built up some equity.
How can I use home equity?
Home equity can be used to make further investments, such as buying an investment property, or financing a renovation.
Using equity to buy a second home
If you’re looking to buy a second property, your home equity could be used as a deposit on another property. This works by using the equity amount as the deposit, in place of handing over a cash deposit, or selling your existing home.
Financing a renovation
Whether your life circumstances are changing, or you want to increase the value of your home, you can use home equity to fund a renovation by withdrawing the usable equity to pay for it. By doing this you are increasing the amount you are borrowing from your lender, or adding to your existing loan.
This is important to consider, as you are increasing your debt and therefore your repayments.
Your home equity doesn’t need to stay in property, you can explore options of using it to invest in other areas and diversifying your assets.
Refinancing your home loan
You may be able to use your equity to refinance your existing home loan to potentially get a better home loan, perhaps with a lower interest rate. This is because lenders tend to prefer borrowers who have a lower Loan to Value Ratio (LVR), as they are seen as lower risk. If you’ve grown your equity and therefore lowered your LVR, you might be able to refinance to a new home with a lower interest rate and therefore lower repayments.
How much equity may be in my home?
To work out the amount of equity you may have, you first need to research current property sales in your area to get an idea of how much your home might be worth. Check this against the amount you still have owing on your home loan. The difference is your potential equity.
It’s worth noting you generally can’t access all your home equity, as most lenders will allow you to borrow up to 80% of your property’s value. It is also important to note that the lender will likely need to organise a valuation of your property through a certified or accredited valuer.
As with any loan, other factors including income, expenses and other debts will be taken into consideration.
How do I build equity?
By making principal and interest repayments on your home loan, you are increasing your home equity. To keep building it, you’ll want to avoid interest-only loans, and consider making extra repayments if you can.
You can also consider making improvements that will likely increase your property’s value.
If you’re interested in using your home equity, you can speak with one of our Home Loan Advisers who will be happy to help.