What exactly is equity? And what benefit does it provide if you’re looking to spend a large amount of money on either a new Colac home – or to renovate your existing one?
Equity isn’t just about property, either – it can be used to help you purchase a new car, or other big-ticket item.
It’s a valuable thing to have when you know how to use it effectively, and can be invaluable in building wealth and financial security.
Below, we have outlined what equity is, how it grows and how you can access it if you don’t already have it.
Equity explained
Equity in your home is the proportion of your property or asset that you actually own.
Or, to look at it a different way, it’s the difference between what your home is valued at, and how much you still have to pay off your home loan.
For example:
Let’s say your home is currently valued at $450,000, and you owe the lender $250,000.
That means your total equity is $200,000.
Then there is your usable equity. Banks will usually lend you 80% of the value of your home, minus what you owe on it.
Based on the scenario of your home being worth $450,000 your usual equity would be the value of your property at 80% ($360,000), minus your mortgage of $250,000.
That puts your usable equity at $110,000.
How does equity grow?
There are a few ways this occurs:
Your property’s value increases
The above scenario demonstrates how an increase in the value of your property will increase your equity. So how do you make sure you snare a property that will rise in value? It’s all about the work you do before you buy!
- Spend lots of time researching the area and the types of property you can afford, or want to purchase (we can help if you need some guidance or assistance with this research)
- Look for areas that are showing economic growth – eg: more jobs in a region mean people will be looking to move there, generating a demand for housing
- Make sure the property is close to amenities like schools and shops – and public transport, if that’s available in the area you’re looking at
- Have you looked into any zoning changes or future developments that might impact your property’s value?
- Think broadly – a property that will appeal to as many future buyers as possible will be more desired, and therefore, more valuable
- Can you improve the property at a reasonable cost to, once again, increase its appeal to future buyers?
Your debt goes down
Another way to increase your equity is to pay more off your mortgage.
By reducing what you owe on your property, you will own more of it outright.
Tactics to reduce your debt can include:
- Selecting a home loan that permits extra repayments over the life of your loan (so that if and when you do have extra cash, you can put this against your home loan without being penalised)
- Increase your repayments. Instead of paying monthly, or fortnightly, make repayments weekly
- Consider a shorter-term loan, that will help you pay off your debt sooner
- Use loan features, like offset accounts – these can help reduce interest and help you build your equity. Every little bit counts!
How can I access my equity?
There’s a few options for you once you’re convinced you have enough equity to make it work in your favour.
Refinance
Let’s say you have found a second property, and want to unlock the equity you have in your first place, so you can put down a deposit.
Refinancing might be your option.
Refinancing involves taking out a new loan to pay off your old mortgage, with some money (your equity) left over.
To do this, your first property will need to be valued (by the way, we can help you find a reputable valuer if you’re not sure where to start.) Once Property 1 has been valued, the bank will consider it’s market value, your income, your expenses and levels of debt – and then decide if it’s worth backing your request to refinance.
Top-up your loan
Increasing or topping up your existing loan could mean you can access extra money.
Your lender will look at the amount of equity in the property, your current financial circumstances, and then decide if you are eligible for a top-up loan.
If this is what you are considering, make sure you are aware that topping up your loan is likely to require increased repayments.
Other options
Perhaps you’re not looking to buy a new property – but improve the one you already have.
In this case, a line of credit could be the solution that best-suits your plans.
Lines of credit mean you can access your equity up to an approved limit.
There’s also options like a redraw facility – this means you can access additional repayments you’ve made on your loan.
Like to know more?
Contact our Mortgage Broking team for a discussion about how to unlock your equity. We are here to help.
