Equity 101: A Guide To Making The Most Of It
Equity is the difference between the market value of your property and the amount you still owe on your home loan. With increasing property values, chances are you have available equity that you may be able to use to your advantage. It’s important to understand the difference between equity and useable equity – as you can’t use all of your available equity.
Banks will usually lend up to 80% on the value of your property, provided you can meet the repayments. Useable equity is the difference between this amount and the existing lending you have against the property.
To calculate your equity, use this example: On a property valued at $600,000 x 80% = $640,000 – Current loan owing $400,000 = $200,000 of useable equity.
Ways to build equity in your home to increase the value of your property.
Making upgrades and renovations can boost the market value of your home. But to avoid overcapitalising, it’s important to consider how much you’ll actually need to borrow. Get a feel for how much it will cost by collecting quotes and speaking to others in your area who have recently renovated. This will give you an idea of the costs you might not have thought about, as well as help work out the style and level of quality you’re hoping for.
Make larger or more frequent repayments
This can help build useable equity by reducing your loan balance. Just note that for fixed rate loans, it might cost you to make changes to the loan or repayments prior to the expiry of the fixed rate period.
Make lump sum payments
If you have come into a lump sum of money, why not put it straight into your home loan? Again, you'll need to check if this option is available.
Link your transaction account to 100% offset
You can reduce the amount of interest you pay by linking an eligible transaction account to a 100% offset facility. Using equity to improve your lifestyle and wealth
Renovate your home
If your home needs a facelift and renovations are on the agenda, it can be worth unlocking the useable equity, and borrowing more to make the changes.
Get a better home loan deal
Most lenders offer lower interest rates for loan that have a low loan to value ratio, you may be able to negotiate a better rate with your current lender, or refinance to another lender to secure a better rate.
Invest the money
If your property has increased in value, the amount of equity you could divert into investments could create wealth opportunities. This means you could make purchases that will increase your asset base – such as investment properties and shares.
Debt consolidation
By refinance higher interest rate debt into your home loan, you can reduce the repayments and overall interest you are paying.
Smooth out life’s bumps
Life events like buying a new car, taking a holiday, or paying for education expenses can make us feel stressed about managing the costs. However, using the equity you have in your home can be a way to ease the financial burdens that life throws at you. Borrowing against your equity can help you pay off the loan over a longer period of time, reducing the impact of large one-off payments.
Above all, remember to play it safe
Unlocking all your equity to improve your lifestyle or wealth will increase your level of risk. That’s why it’s always a good idea to consider how much lending you take on.
To make sure you have a plan in place, it’s best to speak with an expert. Simply contact us at Barwon Mortgages – and let us help you figure out the best solution for your situation.