Homeowners often wonder how to calculate their home’s equity, which is the portion they truly own and is a valuable asset.
If you want to renovate, invest in property, or pay off debt, using your home equity can help.
However, figuring out how much equity you have in your home can be confusing. You often don’t have access to all the equity. In other words, your lender will limit how much equity you can use.
So, we’re here to help you understand the basics.
What is Home Equity?
Home equity is the difference between the current market value of your property and the amount you owe on your home loan. It’s the portion of your home that you truly own. As you make mortgage payments and the value of your property increases, your equity grows over time.
Why is it Good to Understand How to Access This Equity?
Accessing home equity can be particularly helpful for homeowners looking to buy a second property but who don’t necessarily have the funds available for a deposit. Or for those looking to upgrade the property and need access to additional funds to do so.
Using Equity to Secure Another Home Loan
Basically, you use the value of your current home to get a loan for another property’s down payment. Investing in real estate can be appealing because it lets you use what you already have to grow your property collection.
Using Equity for Renovations
When you renovate your home, it can become more valuable, work better, and be more enjoyable to live in. Using the money you’ve invested in your home to pay for renovations can be a smart move. It could even increase your home’s value more than the cost of the renovations.
The Calculation Process
Calculating your home equity involves a simple formula:
Market value of the property x by 80%, then subtract that amount by your current loan balance.
Let’s break down the calculation process step by step.
Step 1: Determine Your Property Value
To calculate your home equity accurately, you need to know the current market value of your property.
To get a quick estimate, you can use online estimators or recent selling prices of similar properties. However, for a more accurate figure, it is best to get a professional property valuation.
Consider engaging a professional property valuer to assess your property’s market value.
Step 2: Determine Your Outstanding Loan Balance
Next, you need to determine the amount you still owe on your existing home loan. You can find this information in your mortgage statement or by contacting your lender directly.
Step 3: Calculate Your Home Equity
Once you have the market value of your property and your outstanding mortgage balance, you can calculate your home equity. Simply subtract the outstanding mortgage balance from the property’s market value. The resulting figure represents your home equity.
For example, let’s say your property is currently valued at $920,000, and you have an outstanding mortgage balance of $430,000. By subtracting $920,000 from $430,000, you have $490,000 in home equity.
Step 4: Calculate How Much Equity the Bank Will Let You Access
Banks and lenders typically won’t allow you to access 100% of your home equity. They usually have a maximum loan-to-value ratio (LVR), determining how much of your home equity you can borrow. The LVR is a percentage that shows the loan amount compared to the property value.
To calculate how much of your home equity you can access, you need to:
- Determine the Maximum LVR: Find out the maximum LVR your lender allows for home equity loans. This can vary between lenders, but it’s typically around 80% to 90%.
- Calculate Your Accessible Equity: Multiply your home equity by the maximum LVR. The resulting figure represents the amount of your home equity you can access.
$920,000 x 80% = $736,000
Current loan balance = $430,000
Accessible Equity – $736,000 – $430,000 = $306,000
Remember, the amount you can get may also depend on other things like your credit, income, and finances.
Lenders will assess your ability to repay the loan before approving it.
Factors to Consider When Accessing Your Home Equity
Before making any decisions, you should think about different factors when accessing your home equity. It can give you financial flexibility.
Here are some key factors to keep in mind:
When borrowing against your home equity, you need to consider any fees associated with a new loan. These fees may include application fees, valuation fees, and legal fees. Additionally, if you borrow more than 80% of your property’s value, you may be required to pay Lenders Mortgage Insurance (LMI).
Before tapping into your home equity, you should assess your ability to make the additional loan repayments. Taking on too much debt can strain your financial situation and put your home at risk. Review your budget and think about possible interest rate changes to ensure you can handle repayments easily.
Utilising your home equity is a significant financial decision, and seeking professional guidance from a mortgage broker is highly recommended. Speak to a financial expert, like an advisor or accountant, who can give you personalised advice. They can help you understand the potential risks, benefits, and alternatives to equity access.
- You can calculate home equity by subtracting the outstanding mortgage balance from the current market value of your property.
- Homeowners can gain financial flexibility by accessing equity. This can help them purchase a second property or make renovations.
- To use equity as a deposit, you can leverage the equity in your current home as collateral. This secures a loan for the deposit on another property.
- Homeowners can use equity for renovations to fund improvements that increase property value and functionality.
- To calculate equity, find your property’s market value, subtract your mortgage balance.
- To calculate accessible equity, multiply your home equity by the lender’s maximum loan-to-value ratio (LVR).
- When accessing home equity, consider loan fees, the ability to repay, and seeking professional advice.
Ready to unlock the potential of your home equity? Contact The Mortgage Agency today and let our experts guide you through the process.