Most Australian property owners are sitting on goldmines, without even knowing it. No, we don’t mean an actual goldmine, but the equity locked in your property, which if utilised properly, can make a solid foundation for future investments, renovations and property acquisitions.
What is equity?
Equity is the amount you get on subtracting the outstanding loan on your property from its total value. Of course, you cannot get the accurate figure unless you sell the house for a particular price, but getting an independent valuation can give you a good estimate.
|Sam owns a house worth $500,000. He has an outstanding loan of $300,000 against the property, which means his equity in the house is $200,000. However, his usable equity is lesser. Banks like to play safe and usually prefer lending only up to 80% of the property value. Thus Sam’s usable equity in this case is $100,000, derived by subtracting the outstanding loan amount of $300,000 from 80% of the property value, i.e., $400,000.|
How can I access the equity in my house?
Refinance – It is possible to refinance your home loan for a larger amount as the equity in your home acts as collateral. You can even receive more than 80% of your property’s value as loan if you take out Lenders Mortgage Insurance (LMI).
|A good idea is to subscribe for a line of credit equity loan. This is akin to a credit card with a much higher limit. A line of credit loan gives you approval for the usable equity amount but you can withdraw it in instalments as and when you require. The interest is only payable on the amount withdrawn.|
Redraw – A redraw facility is a great way of using equity at no extra cost. It is possible to redraw any additional repayments that you have made against the loan, and most lenders offer this at no cost up to certain number of redraws.
A note of caution – The equity in your home is a precious asset that has built up over time. Plan on using your equity home loan wisely, as the loan repayments would still be serviced by you. Are you sure you can afford the additional repayments?
How can I use the equity in my home?
An equity home loan offers lower interest rates and can be used to build more equity in your existing home or building a property portfolio.
Renovate – Change is for good, and rightly so, using equity for smart renovations can not only make your home more comfortable but also increase its value, thereby building equity.
Make planned renovations in line with what people are demanding in the market to get the max from your investment.
For example, if your home is worth $400,000 and you owe $200,000 on your mortgage, you have $200,000 in equity. Using 50% of the available equity ($100,000) to renovate can increase your property’s value to almost $600,000, owing to the value additions made by you.
Buy an investment property – Use equity in your existing home to buy an investment property. As a thumb rule, you can borrow up to 4 times of your usable equity for as an investment loan. However, plan ahead to pay your existing loan in time, as it is not tax deductible like the equity you use to buy your investment property.
Meeting other lifestyle goals – You can use the equity for many approved purposes (banks may require proof of how use the equity loan) such as funding your business, buying a car, for your kids or even a facelift! It is also possible to invest in shares and funds as well.
How to increase the equity in my home?
Planned renovations and buying investment property can help build up equity. It is also possible to build equity by buying houses with large area of land that can be subdivided. Looking for dilapidated properties (in high growth areas) that can be fixed for cheap can make you handsome profits. Order your free property report to understand the property market and read here to find the next booming suburb.
Remember, even though you can access equity for various purposes; only use equity when you really need it and only if you can afford the extra repayments. Having equity doesn’t always mean you would be able to access it. Banks assess your application on various factors such as employment, credit history, savings and age. Using an expert mortgage broker can help you with the process.
By Vidhu Bajaj