Equity is the difference between your property’s market value and the balance you still owe on your mortgage. If you’ve been a homeowner for a few years, you’ve likely built up equity, which can be a valuable resource.Â
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You can access equity in your home to invest in property, renovate, pay off debt, or to take advantage of other opportunities. It’s a savvy alternative to a personal loan or line of credit because the interest rates are lower, which saves you money over time.Â
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In this guide, we’ll share information on how equity works, how to access equity in your home, and the benefits of doing so.
What Is Home Equity?
Home equity is the difference between the current market value of your property and the amount you owe on your mortgage. It’s the part of your home that you actually own. As you pay down your mortgage, and as the value of your property increases, your equity grows.
A home equity lender will calculate usable equity by deducting the remaining loan amount from the property’s current market value. Given the range of market fluctuations that can occur (influenced by interest rates, economic growth, housing supply, etc.), the amount you have available for this particular cash-out refinance method may vary.
Here’s an example of how to calculate home equity
Joan bought a house for $450,000 and paid a $100,000 deposit. Therefore, Joan has $100,000 worth of equity in the property.
Over the next few years, the property value increased to $600,000. During that time, Joan repaid $150,000 on the loan.
The formula for calculating home equity is: (Current value of your property) – (Outstanding home loan balance) = Home equity.Â
To use Joan’s example: $600,000 (current value of her property) – $200,000 (outstanding home loan balance) = $400,000 (Joan’s equity in her home).
How Do You Take Out a Home Equity Loan?
Equity loans let you borrow against the equity in your home. If approved, you can use the equity loan money for almost anything you’d like, from property investment to clearing other debts to home renovations. Here are the steps to follow to take out a home equity loan and access equity in your property.
Determine How Much Equity You Can Access
It’s important to understand that lenders don’t allow access to the full amount of available equity. Instead, they’ll focus on your ability to make repayments on the loan (also known as ‘loan serviceability’) when considering the amount you can access, along with their normal lending criteria.Â
Most lenders work out your accessible equity using 80% of the property’s market value.
The formula for calculating accessible equity is: (80% of your property’s current market value) – (Outstanding home loan balance) = Home equityÂ
To use Joan’s example: $480,000 ($600,000 x 80%) – $200,000 (outstanding home loan balance) = $280,000 (Joan’s accessible equity).
Review Different Equity Home Loan Options
There are different equity home loan options to choose from. It’s a wise idea to employ the services of a trusted mortgage broker and work with them to select the option that’s right for you.
Mortgage Refinancing
A mortgage broker can check your existing loan in comparison to the fees and features of other loans. They can also compare available interest rates from different lenders. If you’re refinancing your existing mortgage to borrow an extra amount, it’s a good opportunity to secure more favourable terms.
Redraw Facility
If you’ve set up a redraw facility on your existing home loan and have made additional repayments over the years, you can redraw that cash and use it however you’d like.
Additional Top UpÂ
An additional top-up allows you to borrow money on top of your original mortgage, potentially at a different interest rate.
Calculate The Costs Of Accessing Equity
Different fees and charges are involved depending on the financial product you choose and how much equity you’d like to access.Â
For example, drawing more than 80% of your property’s value will probably mean you’ll have to pay lenders mortgage insurance (LMI). Changing to a different lender may also include fees on both sides, such as break fees or a new loan application fee.
Loan Application And Settlement
Once you’ve discussed your options with your mortgage broker, they’ll help you get the application process underway and guide you to settlement.
Why You Should Use the Equity In Your Home
The equity in your home is a valuable resource. It’s a convenient lump sum that can be repaid with fixed monthly payments at more favourable interest rates than a personal loan or line of credit.Â
How does equity work? You can use it in a variety of ways to improve your financial wellbeing.
Invest in property
One of the most popular uses of equity is taking money out of an existing property to help you buy another property. Doing so fast-tracks the deposit-saving process, and it’s a good way to increase your property portfolio.Â
Home Improvements Or Renovations
Use the equity in your home to increase the value of your home. Home improvement projects are another popular reason to draw from your home’s equity because these projects can add value to the property.Â
Whether you’re repairing something (like your roof or driveway) or renovating (adding an additional bedroom or solar panels), using your equity to improve your home benefits you in the short- and long-term.Â
Other Investments
Having equity in your property doesn’t mean it needs to stay in the property. You might also want to consider investing the equity in the market. You could also use it to consolidate or pay off other debts, freeing up more money to put towards your mortgage or other obligations.Â
Key Takeaways
If you’ve owned your home for a few years, you’re likely to have equity in your home. You can access that equity to make important life changes, whether you’re looking to buy an investment property, pay off debt, start a small business, or renovate your home.
A home equity release gives you access to a sum of money at more favourable rates compared to other credit cards or loans. In addition, it provides a good opportunity to make changes to your home loan, consolidate debt or secure better interest rates or repayments.
If you’re interested in learning more, contact us. Our home equity specialists will help you find the best equity release product to suit your needs.
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
Key Takeaways
The equity in your home is calculated by deducting your home loan’s outstanding amount from the current value of your home, based on market conditions.Â
Lenders work out your accessible equity by using only 80% of the property’s market value. You can then access that available equity by refinancing your home loan.Â
Other options include withdrawing from your redraw facility or taking an additional advance.
Accessing your equity is convenient and straightforward, and you can use the money for anything, such as wealth creation in buying an investment property, home renovations, or even debt consolidation.
Using a home equity loan is generally cheaper than taking out a personal loan or a credit card as the interest rates are more favourable.
If you’re interested in accessing your equity, contact one of our brokers from The Mortgage Agency today. We’ll assist with the entire process from application to settlement, and ensure you get the best deal to suit your personal circumstances and financial situation.
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Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
