The equity in your home is the difference between its market value and your remaining home loan balance. To put it simply, this is the value of what you currently own in your home. For example, the market value of your home is $350,000 and you still owe $200,000. When you subtract the loan balance from your property value, you have equity of $150,000.
Your equity tends to build overtime as you continue paying off your loan and as your property value increases. So, if your $350,000 property increases in value by 12% in a year you’ll have an extra $42,000 in equity. Plus the repayments made over the course of the loan can significantly increase your equity. Use our equity calculator to help you find out how much usable equity you have.
There are number of ways you can grow your equity, here are some of them:
Additional lump sum payments are advantageous in growing your equity and cutting your future interest charges.
Making extra or larger repayments than the minimum repayments required can also increase your equity.
Shortening your loan term from the typical 30-year mortgage will increase the size of your repayments but will also speed up your accumulation of home equity.
Home improvements, renovations and maintenance can also grow equity by increasing the value of your home.
As long as you decrease your home loan debt, or increase the value of the property through capital growth or renovations, you will increase your home equity over time.
Equity is an important asset for every homeowner as it can be beneficial in many ways. You can use your existing equity when you need a loan. This type of loan is called a “home equity loan” where the borrower uses their home equity to cover the deposit on a new property, while using their current home as a collateral.
Accruing a big chunk of equity can provide many opportunities. If you plan on selling your house, the equity turns into cash once the home is sold. Your equity can be used to finance a new car, fund your home renovation, invest in the share market, for education, or for a family vacation. It may also help you to buy your next house or investment property sooner since you won’t need to save for the whole deposit, which can take time.
Your lender will conduct a valuation on your property to see the current value of your house. They will also asses your loan to value ratio (LVR) to ensure some equity is held as security. This can also help you determine how much equity is left after refinancing.
Applying for a home equity loan is like applying for a traditional home loan. Lenders will assess your income, expenses, credit history, your home market value, and borrowing capacity.
Thinking of refinancing? Find out more about how much equity you need to refinance your home loan.
You may be able to use the equity in your home for a number of purposes, but some of the most common uses include:
Buying an investment property
Some people use the equity in their home as a deposit for an investment property. You may also be able to negatively gear your investment property. Lenders generally allow borrowers to borrow up to 80% of the propertye value, minus any outstanding debt.
Renovating your home
Another common use of equity is to use to fund your home renovation project. To do this you refinance with a new or an existing lender and increase the amount you owe to the lender to gain the renovation capital.
Using equity for investments
Some people also decide to use the equity in their home to grow their wealth further by investing in the share market or starting a business.
One way to access the equity in your home is to refinance your mortgage. The lender may request a formal valuation to be done on your home. Once your property has been valued the lender can give you a clearer idea of how much equity you can use.
How do you build equity in your home?
You can build equity in your home by making more frequent or bigger mortgage repayments. Increasing the value of your property via renovations can also build equity.
What is equity release?
Equity release is a way of accessing the equity you’ve built up in your home. You can access your equity as a lump sum or via several installments. You can do this via a number of ways like refinancing, drawing down on your mortgage repayments.
How do I use equity in my home to buy an investment property?
If you want to use the equity in your home to buy an investment property, you need to calculate how much usable equity you have. Keep in mind you may not necessarily be automatically approved for that loan amount, as you’ll still need to go through the lender’s usual approval process. Banks will usually allow you to borrow up to 80% of the value of your property but they will also take other factors like your income and debts into account.