Understanding home equity

September 28, 2017
Benjamin Williams

As a home owner, you have access to an outstanding resource – your home equity. We explain what it is, how to maximise it, and how to make the most of home equity.

Around two out of three Australians live in a home they own, and that means being able to tap into a precious financial resource – home equity.

What’s ‘home equity’?

If you’re not familiar with the term, home equity is simply the difference between what you owe on your mortgage, and your home’s current market value.

For instance, if you have a home worth $600,000 and the balance remaining on your loan is $250,000, your home equity is worth $350,000. Or, if you own your home mortgage-free, the full value of the property represents home equity.

How can I use home equity?

You probably see your home as a wonderful place to live. But from a financial perspective, your home equity is a valuable asset that can be just as good as cash in the bank. Some lenders will even let you use home equity in lieu of a cash deposit to purchase an investment property to build further wealth. Your Mortgage Choice broker or financial planner can provide more details.

How you can grow home equity

Home equity typically increases over time through two main ways – first, the gradual paying down of our home loan, and secondly, by an increase in property values.

But it’s possible to fast-track equity growth.

Every time you pay more off your home loan, you’re not just whittling away the debt, you’re also giving home equity a boost.

Similarly, undertaking quality renovations can see an uptick in your home’s value, and therefore your equity, even if the property market is experiencing a lull.

Accessing home equity

For previous generations, the main (and often only) way to dip into home equity was by selling a home. These days, it’s possible to access home equity by refinancing your mortgage.

That said, home equity is not something to give away lightly.

If you’re thinking about putting your home equity to work, consider these simple steps to be sure the money is being put to good use.

  • Have a sensible plan. Don’t leave the money sitting in the bank for too long, where it will earn next to nothing in interest.
  • Avoid using home equity for here-today-gone-tomorrow purchases like designer clothing or luxury cars.
  • Speak with experts like your Mortgage Choice broker to know how much equity you can access. Individual lenders have differing views on how much they will lend to you.

Remember, accessing home equity through a top-up of your current loan or by refinancing altogether can mean repaying more each month or extending your loan term. Speak with your Mortgage Choice broker to know if using home equity is the best choice for you.

Posted in: Tips

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