One of the most powerful tools available to a homeowner, when it comes time to borrow again, is home equity, which can save both time and money.
Saving for a house deposit is very difficult to do. Domain research from 2020 shows the time it takes to save for a house deposit on the average house price now takes around four and a half years, and up to six and a half in Sydney.
But if you’ve built up enough equity in your home loan, you may not need a deposit at all. Let’s explore the difference between a deposit and equity.
What is usable equity?
Whereas equity is simply how much of your current property you own (compared to how much you still owe), usable equity is how much of your equity you can use to borrow. For example, let’s say you have $200,000 in equity on a home worth $500,000 (40% equity). When you approach a lender to borrow using equity, they usually allow you to use up to 80% of your property value to borrow.
In this case, equity of 80% would leave you with usable equity of $100,000. As long as you continue to make regular repayments on your property and its value steadily increases, the amount of equity you have, and therefore your usable equity, will continue to increase as well.
Calculate your usable equity here
Equity vs deposits: Do you need a deposit if you have equity?
If you have enough equity in your home, you usually don’t require a deposit, since equity acts a deposit. Using that example above, you could use $100,000 of your equity as a deposit to borrow with, saving you the trouble of having to scrimp and save thousands for another deposit.
Of course, there are still other costs to factor in - borrowing a for a house, for example, might still require you to pay stamp duty and legal fees - but usable equity can be a much more cost-effective way of borrowing than building another deposit.
What can you do with equity?
Equity is extremely useful for a number of purposes. Equity is mainly talked about in the context of buying property, and it is highly powerful for that. But beyond buying and refinancing property, you can also use home equity to:
Renovate and extend your home
Buy a new car
Go on holiday
Pay for a wedding
Consolidate your debts into a lower rate home loan
Invest in shares (borrowing to invest)
Again, accessing equity for any of these things can potentially be much more effective than dipping into your savings, you should weigh up the pros and cons of doing so. Having a large sum of equity could also tempt you into making rash financial decisions, where saving over time can be a more measured approach.
How do you access your equity?
There are several ways you can access your equity, with the most common generally being:
By using a redraw facility;
By adding extra to your current home loan, borrowing more
Or by refinancing your current home loan
The main way you can access your equity is by refinancing your existing mortgage to a different loan, possibly one with a lower interest rate or to a different type of home loan. When refinancing, a lender will often conduct a formal valuation on your home to work out its current value, and this new value will determine how much equity you’re allowed to use.
Refinancing to access your equity can also mean bigger repayments as you’re borrowing more money (especially if you’re buying a second home), so carefully consider if you can afford the extra repayments.
How to calculate your equity
If you’re thinking of buying a second property, funding a renovation or even paying for something like a wedding or a holiday, working out how much equity you have could be a very cost-effective way of doing so.
loans.com.au’s home equity calculator can help you work it out how much equity you have in your home in order to help fund your next move. All you have to do is enter:
This should tell you how much total equity you have, and how much of it is usable. Once that’s done, speak to loans.com.au lending specialist and find out if you qualify for pre-approval to get started on refinancing.
Calculate your home equity