It’s easy to think of your mortgage as a never-ending series of repayments, but every payment you make is building up the amount of equity in your home - and you may already have a substantial sum available.
If you’ve been dutifully making your monthly home loan repayments for years, perhaps even making extra payments to get on top of your loan, there’s a good chance you’ve built up a solid amount of equity in your home by now.
Using the equity in your home, whether to invest in a new property or make improvements to your existing one, is a popular wealth creation strategy for homeowners.
Here are some smart ways you can use the equity in your home.
Firstly, what is equity?
Equity is the difference between the value of your home and the outstanding balance on your home loan. Say you have a home that’s valued at $500,000 and you still owe $300,000 on it - the equity being held in your home would be worth $200,000. The more your home has risen in value since you bought it, the more equity you’ll have. On the flip side, if house prices have gone down, your equity may have decreased.
You can build up equity by making bigger repayments, increasing the value of your home, and making additional lump sum payments.
How do I access my equity?
The most popular way to access your equity is through a top-up loan. A top up loan is an increase in your existing home loan, where you are lent more money secured against your home.
Even if you borrowed as much as you could when you bought the home, you may still be able borrow more now because, if you have paid down your loan and the value of your property has risen, your equity in the home will also have grown.
When you have more equity, you can borrow more money against it.
How to access your equity
The first step is to call our Customer Care team on 13 10 90 and they will put you through to the right specialist, depending on your loan purpose.
After that, you will lodge a normal home loan application. This is where you start to get benefits from sticking with the same lender. Your application will be completed quicker than usual because you won’t have to supply as much supporting documentation as a first time customer would.
To help you easily keep track of the interest charges and the repayments on the new debt, a split facility will be created for you.
What do people use their equity for?
If you have a significant amount of equity in your home, it can open up a number of doors to use these funds.
Many homeowners use equity for:
Building wealth (purchasing another property or buying shares)
Funding a career change or further education
Paying for a child’s wedding
Let's look at a few of these in more detail.
1. Use your equity as a deposit for a second property
Using equity to fund the purchase of a second property is one of the best-known uses of equity.
Buying a second property using the existing equity in your home as a deposit (rather than saving up a cash deposit), has two major benefits.
The first is that you can buy that second property sooner. Saving for a house deposit can take years, by which time the value of that property may have increased significantly and your deposit is worth less. Buying that second property now with equity allows you to snap it up at a potentially lower price.
The second major benefit is that you’re not dipping into your savings. Having an emergency stash of cash is important for any household, and becomes even more important when you’re buying another property.
Your lender will request a valuation to assess what the value of your property is, which will then be used to determine how much usable equity you have.
2. Use your equity to renovate your current home
Another way you can use equity to grow your wealth is by funding a home renovation with it.
Many people withdraw equity for renovation because they want to add value to their property or need to renovate to accommodate changing life circumstances.
Using equity for a renovation can be a smart decision as most renovations will add value to a property. There are some exceptions, such as strange colours or furniture or fittings that buyers may find off-putting.
Swimming pools can sometimes be detrimental to the value of a property as they can be viewed as too high maintenance and hard to remove.
Instead, high-value home improvements like a new kitchen or bathroom, solar panels or insulation, will often generate more value over time than the cost to install it.
3. Use your equity for other investments
Equity can be used for other investments besides property. Diversifying into a different asset class, such as shares can be worth considering as this still falls under the category of wealth creation.
Other investments may include the share market, bonds or a range of managed funds. Obviously, these options all have different levels of risk attached, but they show the variety of ways you can utilise equity in your home to grow your wealth.
As always, it’s important to speak with a financial adviser who can take into account your risk profile, goals and objectives before making any decisions.
Risks of using equity
As with any investment, it pays to be aware of the risks.
If you’re opting to buy a second property using equity as the deposit, you’re concentrating your wealth on property and aren’t diversifying your assets by sector. If the property market drops, so does the value of your home. Of course, if the market goes up, you could be in a position to do very well.
While some homeowners use equity to fund a holiday or buy a new car, this isn’t always the best use of it as they are both depreciating assets. Holidays and new cars are fun purchases, but borrowing money for anything that will only depreciate in value comes with a greater risk.
For example, imagine you’ve used equity in your home to put towards a $60,000 car loan with an interest rate attached. In five years, you may end up having to pay up to $75,000 for the loan plus interest, but the depreciated value of your car at that time may only be worth $40,000.
For this reason, many people think it’s better to use your equity to build wealth (eg. through property) and save up for discretionary purchases like a holiday or a new car.