Let’s face it your home is most probably your biggest asset and in this article, I plan to help you understand the basics of increasing the equity in your home and then tapping into it to turn possibilities into realities.
SO, WHAT IS EQUITY?
Equity is the difference between the market value of your property and the amount you still owe on your home loan. E.g. if your property is worth $400,000 and you owe $100,000 you have $300,000 in equity.
It’s important to understand the difference between equity and usable equity. You can’t use all your available equity.
Since a lender is lending you money against the value of your home, they won’t lend you the full amount. If house prices drop, they don’t want an outstanding loan that’s worth more than your property. Typically, they’ll lend you 80 percent of the value of the property, minus the debt you still owe on your home. This is your usable equity. E.g. if your property is worth $400,000 and you owe $100,000 you have $300,000 in equity however you only have $240,00 in usable equity.
BUILDING EQUITY IN YOUR HOME
The most obvious solution to most people is to increase the value of your property
Making upgrades to your home by renovating or extending it is a great way to increase the market value of your home. Before you invest a lot of money into upgrading your property, however, do your due diligence to avoid over-capitalising.
Get a feel for what prices renovated properties are selling for in your suburb. By doing this you’ll also uncover the style and quality level that your renovation needs to be for the area.
Increase the regularity and/or size of your payments
An obvious way to increase your equity in your home is to reduce your loan balance. If possible, make extra repayments or increase the amount you repay each month. Our loan repayments calculator can show you how much time and interest you could save by changing your repayments. You’ll need to check whether this is possible with your current loan.
Opening a 100% offset account is a good way to increase your equity. Your savings will be offset against your loan balance, to reduce the interest you pay on your loan.
USE HOME EQUITY TO IMPROVE YOUR LIFESTYLE OR GROW YOUR WEALTH
Renovate your home
Chances are your home may have increased in value since you bought it. You may have also reduced your loan balance over time. If your home needs a facelift and renovations are on the agenda, you can use this increased home equity to pay for it.
Invest the money
The equity you have in your home can be a powerful tool for wealth creation. If your property has increased in value, the amount of equity held in that property will have increased too.
You can then use the increased equity as collateral to secure further lending. Rather than saving for years to fund a deposit for another property, you can use the equity you already have to take another step on the property ladder.
In addition to investing in property, home equity can be used to start a business or invest in the share market as a way to meet your financial goals.
But above all, remember to play safe. If you don’t have any funds outside your home equity, then it’d be risky to use every last cent of your usable equity to invest in property. You always need a buffer, some funds in reserve in case things don’t go to plan. Even if it means you can’t invest for a while, it’s important to keep yourself protected.