The equity in their homes is a major source of wealth for most Australians. Simply speaking, home equity refers to the difference between the market value of your property and the debt outstanding against it. Many lenders allow you to access up to 80% of the equity built in your home as an equity home loan that can serve as a quick source of handy cash in emergencies.
According to a report, as on December 2015, home owners in Australia have accumulated, on an average, 48.4% equity in their properties, which equals a large sum of $242,642. In fact, in Sydney and Melbourne, on an average, the value of residential properties is more than double the debt held against them.
With steadily increasing property prices, it sounds like an attractive proposition to tap into some of that equity or wealth for meeting your other requirements.
Here are some situations where using the equity in your home loan makes sense, and not!
1. Home Loan Deposit for an Investment Property – Yay! Using the equity in your home to fund the deposit for purchasing an investment property is a smart way to build your wealth by creating a property portfolio. Keep these practical guidelines for property investment in mind to avoid common pitfalls and check out these next booming suburbs for a killer investment.
2. Meeting Daily Expenses – Nay! If you find yourself hard-stretched to meet your daily expenses, including groceries and utility bills, tapping into your home equity for meeting these daily expenses is an absolute no-no. A more prudent step would be to make a list of your in-comings and outgoings and create an effective household budget focusing on your ‘needs’ and trimming down the ‘wants’ to bring down your expenditure and increase your savings.
3. Home Renovations – Yay! Using the equity built in your home for well-planned renovations such as adding a new roof, renovating the kitchen or the bathroom or even constructing a granny flat, a garage or landscaping the lawn will add a lot of value to your house, quickly building up the equity in your property. It will also make the house more comfortable for you.
A line of credit equity home loan is a good option while renovating as it allows you to borrow according to your requirement (and the value of your home).
4. Funding a lifestyle – Nay! Tapping into your home equity for meeting urgent emergencies, renovations or making investments is a smart move, but using the equity you built so painstakingly over the years to buy a fancy car or take a luxury vacation may not be a great move. For buying a car, it is better to look for a competitive car loan in the market.
Remember, your equity is not just a source of cash, but an investment you have made over the years. Use it judiciously to build your wealth further.
5. Consolidating Debt – Yay! Using equity to consolidate your high-interest rate debts under a single mortgage with a low-interest rate may help you manage your finances better and get rid of the debt, quickly, However, by doing so, you are refinancing a short term loan over a much longer term. Maintain utmost discipline to pay off your debts in time.
Work out your repayments with our mortgage repayment calculator.
6. Funding Education – Maybe! Using an equity home loan to fund your child’s higher education is a great way to get a student loan at a low interest rate. However, this is a tricky situation, especially if you are in your fifties or nearing retirement. It might make better sense to ask your children to take their own student loans.
Using your home equity for other purposes is an attractive proposition, but it also means that it will take you longer to pay off your home loan. Apart from losing the ownership in your house, it means taking up additional debt that will have to be repaid eventually. Think hard and think long before cashing into your equity, your financial security is important!
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