Unlocking your home’s equity can help open up new opportunities for you and your family. You might find yourself in a position where you’re looking to invest in more property. Or even thinking about renovating an existing one.
Of course, you’re going to need to fund it somehow. Using the built-up equity in your current home is a savvy way to help finance your next venture.
What is equity?
Equity is one of those common mortgage terms that everyone is unfamiliar with. Equity can best be defined as how much your home is worth minus how much you owe to the bank.
If you’ve had your property for a few years, the chances are you may have built up equity that you could use in a range of ways. Working out your home equity is pretty simple. Once you know the current value of your home, all you need to do is take away the amount still owing on your home loan.
Home worth – debt = equity.
What can you use home equity for?
The equity in your home can be used to secure finance for a variety of things. As you’re effectively increasing the amount you owe to your lender and using your home as security for your borrowing, it is wise however to think about the long-term impact of taking on added debt.
You can take advantage of your home equity in a number of ways:
- Buying an investment property
You can refinance your current home loan to access your equity and use it to invest in a rental property. You’ll usually enjoy capital gains and the rent you receive can help pay off your mortgage or give you funds to invest further.
- Renovating your home
Got an idea to improve your existing home? Accessing your equity could help turn those renovation goals into a reality sooner. When done properly, renovations can substantially increase the value of your property and help maximise the resale value of your property in the future. It is also important not to make improvements that exceed the value of your property, this is also known as overcapitalisation.
- Funding for other purposes
Perhaps you’re looking to consolidate several debts into one monthly mortgage repayment to help you get on top of your finances. Or you simply must sort out some pressing financial needs. Whatever the case, you can use your equity to free up cash for a variety of approved purposes.
Keep in mind that borrowing money to pay for holidays or things that depreciate in value will come with greater risk.
How to access your equity?
The good news is, you can access it – without having to sell your home.
Depending on your financial goals, mortgage refinancing is a common way of tapping into the equity you've built up in your existing property. You may be able to borrow up to 80% of the equity in your home, subject to serviceability.
If you have usable equity and are ready to access it, you first need to have your property valued by your lender. This is called a bank valuation and will usually be lower than the market value a real estate agent might give your property.
Once your property has been valued, your lender will be able to give you a clearer picture of the usable equity in your home. From there, the next steps are up to you.
How to increase equity in your property?
There are several ways to actively build equity in your property - one of the most popular being renovating the property to add value.
The kind of improvements you do and how much you spend will depend on your situation. If you are looking to build equity in your property and make money out of it, it’s important you don’t spend more than you can potentially recoup should you decide to sell.
Some simple improvements many people consider when looking to renovate include:
- Internal and/or external painting
- Landscaping
- Roof replacement or repairs
- Floor replacement or repairs
- Bathroom renovation
- Addition of a new bathroom
- Kitchen renovation
- Additional storage such as built-in wardrobes
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