Having extra equity in your home could lead to many possible avenues for a homeowner. If you’ve been looking to renovate, buy a new car, take an extended holiday or even purchase an investment property, you could utilize the equity in your home to do so.
So, what is equity? Equity refers to the difference between the estimated value of your home and any money owing on the property. As an example, if your house is estimated to be worth $500,000 and you have a $350,000 mortgage, the equity in your home is $150,000.
One item that does often get confused is the difference between equity and what I like to term “useable equity”. When we are borrowing using the equity in our properties, we can only ever borrow to 80%, 90% or sometimes 95% of the property’s value – this is known as the LVR or Loan to Value Ration. Although you might have $150,000 in equity in the above example, you can only access $50,000 if borrowing at an LVR of 80% or $100,000 if borrowing at 90% (this may attract Lenders Mortgage Insurance however). As such, when looking to borrow against the equity in your home, we need to mindful of the actual useable equity available. If it is insufficient, then the only way, generally possible, to utilize the properties full value is to liquidate (sell) it.
As mentioned earlier this equity can be used for a range of different purposes, from renovations to holidays and everything in between, but how do we increase the equity in our home which can ultimately broaden our future possibilities?
Put down a large deposit when purchasing
The larger the deposit you pay, the lower your mortgage which will lead to instant equity. This is all dependent on the estimated value of your home, but it stands to reason that if you can reduce the home loan you require to purchase the property, you could have quite a bit of equity in the property from the get-go.
Increase the value of your home
By increasing the value of your home, you are increasing the difference between how much your property is worth and how much you have left owing, again increasing the equity. In order to increase the value, you would typically make additions or alterations to the property that would drive up its value. Unfortunately, this can be tricky as putting in a new pool, for example, that might cost $20,000, doesn’t necessarily increase the value of your home by $20,000. Be diligent and do your research before taking on any works to your property to ensure that the money you are spending to improve your home gets the value outcome you are looking for.
Opt for a Principle and Interest Loan
If you want to increase your equity, it’s important to ensure that you’re paying down your loan and not just paying only the interest. By choosing a principle and interest loan structure as opposed to interest only, you know that you are actively paying down your loan and therefore are reducing the amount you’ll pay in interest compared to an interest only loan and you’ll reduce your principle faster.
Pay down your mortgage faster
As your mortgage decreases, the equity in your home should increase, dependant on your home’s value. By making extra repayments over time and ensuring that you have a highly competitive interest rate, you can grow your equity quicker than if you were to just to make the minimum repayments.
Make use of an offset account
An offset account is an account linked to your home loan in which you can deposit funds which will be offset against your home loan. If you have a mortgage of $300,000 and a balance of $60,000 in an offset account, you will only pay interest on the difference, being $240,000. The loan repayments will still be based on the higher loan balance (if paying principle and interest) meaning you will automatically be paying more off the loan, reducing the amount of interest you pay and therefore allowing you to put those extra funds towards paying down your home loan. You can also withdraw this money at any time so it can act as a nice little safety net for unforeseen future events.
If you’re looking to utilize the equity in your home or planning on completing works to a property to try and improve its value get in touch with your broker to ensure the right process is followed and you have the best chance of maximizing your position
Owner / Multiple Franchise Manager