The obvious benefit of paying off a mortgage is owning your property, but homeowners have another lucrative benefit, too.
Building up home equity in your property by servicing your loan means you’ll have access to that equity after several years. Equity release loans can be more affordable than personal loan or credit card due to more favourable interest rates. Equity also has other uses such as putting it towards the deposit on an investment property.
If you’d like to let your equity to work
for you, especially when the value of your home has increased, here’s everything you need to know about an equity-release mortgage.
How Much Equity Can You Access?
Calculating your home equity requires assessing the current market value of your property.
The formula includes deducting the amount of money you still have outstanding on your mortgage from the current property value, with the difference being your home equity.
Example:
Max had his home reevaluated and now has a market value of $600,000. He still has $200,000 left to pay towards his home loan, and therefore has $400,000 available in home equity.
Lenders will refer to your “accessible equity,” which they calculate using 80% of the equity in your home, minus the loan amount you still owe.
Example:
Max’s home has a value of $600,000, with $200,000 left to pay towards his home loan.
$600,000 X 80% = $480,000
$480,000 – $200,000 = $280,000
Max therefore can access equity up to a maximum amount of $280,000
How Do You Access Your Home Equity?
As a homeowner, you can use a home equity loan to borrow money against the equity in your property. The purpose of these funds could be for personal or investment use.
Whether for debt consolidation, to fund home improvements, or to support retirement needs, most people undertake an equity release by refinancing their existing mortgage. You can do this with your current lender or different lenders with an Australian Credit Licence that offer a better deal.
Remember, refinancing your home loan to access enough equity will mean larger monthly payments. As such, the lender will have to evaluate whether you can afford to take on this additional cost as part of the application process.
Using an Equity Release Mortgage To Buy an Investment Property
Using the equity in an existing property to purchase more investment properties is a sound investment strategy, allowing buyers to grow an established portfolio without having to save the additional cash.
Buyers can benefit from getting into the market sooner, which means they’ll have access to current prices and reap the rewards if prices grow.
Using this approach over time and continually adding more properties to your portfolio will create a compounding effect. When the property market rises, and the future value of your portfolio, so, too, will your usable equity through a reverse mortgage.
Of course, the reverse is also true should the property market fall.
Releasing Equity To Buy a House With No Deposit
Leveraging is a tactic whereby investors use the equity in their current property to buy another property without any additional deposit.
For this strategy to be successful, the value of the first property must rise while you continue to pay off the mortgage.
Example:
Jemma bought a property for $400,000 and paid a 20% deposit of $80,000. She took out a loan for the other 80% ($320,000).
If the property increases in value to $500,000, this will mean that the 80% mortgage will become only 64% of the value of the property.
Jemma can now refinance her mortgage and raise her loan to 80% of $500,000. This will create a cash pool of $80,000.
If Jemma can find a second property worth $320,000, putting down that $80,000 deposit from her home’s equity means she won’t have to pay any money out of her pocket.
Plus, paying a 20% deposit alleviates the additional fees of Lenders Mortgage Insurance (LMI).
Remember, an equity release to pay the deposit for a second property means you have to pay off two home loans simultaneously. It’s crucial to ensure your regular income stream will be sufficient.
Additionally, refinancing your first property so that you can release equity means increasing the amount you owe on your first home loan.
An Equity Release Loan to Undertake Home Renovations
Another smart way to use a home equity release is to fund renovations and improvements on your main residence, such as a new kitchen or bathroom. Doing this will increase the value of your home, subsequently increasing your home equity.
Employing a property valuer could help provide professional advice on exactly how much value the renovation project you’re planning will add to your property, how much it will cost, and if it’s worth exploring voluntary repayments.
Key Takeaways
If you’ve been a homeowner for many years and have paid off a large amount of your mortgage, you will likely have a decent chunk of equity in your home.
A home equity release provides access to a lump sum of money with a favourable rate compared to other loans or credit cards.
You can release your home’s equity while you continue living there by refinancing your loan—either with your current lender or a new one. This is a great opportunity to make any changes you’d like to your home loan, consolidate debts, and get an even better interest rate for more manageable repayments.
There are two equity release options that property investors can choose:
- Using the equity from their current property to pay the deposit of their new property.
- Increasing the value of their property by using the equity to pay for renovations and improvements.
If you’re interested in releasing equity from your home, contact our brokers from The Mortgage Agency. Our home equity specialists will assist you in finding the best equity release product to suit your financial situation.
