Across most of Australia and New Zealand house prices have jumped considerably over the past 10 years (2006-2016). There’s no doubt that a lot of our wealth is locked up in real estate. But how do you access that wealth? And how do you make your biggest asset work harder for you? Read on to find out how you can make your home equity work for you.
What is home equity?
Home equity is the portion of your property’s value that you own. It’s calculated as the difference between what your home is valued at on the current market, and how much money you still owe on it.
In simple terms, equity is the unrealised value in an asset. For example, if your home is worth $500,000 and your mortgage is $250,000, you have equity of $250,000.
Once you have enough equity, there are a few ways you can make it work for you - refinancing your mortgage with better terms so you can pay off your mortgage quicker, renovating to increase your property’s value, or buying an investment property to generate wealth through rental income.
Access equity by refinancing
Refinancing your home loan to a better interest rate or terms could save you thousands of dollars of mortgage repayments over the life of your loan. Many refinance home loans reward lower loan-to-value ratios with better interest rates. So, the more equity you’ve built up in your home, the better the interest rate you could get when refinancing.
Refinancing is also a means of tapping into the equity in your home to use to buy a second property, renovate your existing home, buy a new car, or pay for a holiday. The amount you may be able to borrow will depend on the current value of your home, how much security the lender requires, as well as your ability to service a bigger mortgage.
You’ll need at least 20% equity in your home to qualify for a refinance mortgage. Applying for a refinanced home loan with little or no equity is tricky, so it’s best to get advice from your mortgage broker or mortgage adviser before you make any decisions.
Renovate to get returns
Adding onto your home through extensions or internal renovations, landscaping or improving outdoor entertainment areas all add value to your home which in turn increases your equity. How much value? It’s hard to say for sure, but some real estate agents suggest as much as $200k could be added to the value of a property with the addition of one extra room.
If you’re not in a position to finance extensive renovations - like a kitchen upgrade or the addition of a second bathroom - start small. A fresh coat of paint on the inside or the outside of your home can add value for a relatively low cost. When considering renovations to your home, keep in mind the risk of over-capitalising on your property.
Grow your property portfolio
Using the equity in your current home as a deposit for an investment property, could be just the boost you need. Buying an investment property in the right area could provide you with a regular rental income and potential capital growth on your investment.
The more equity you have, the bigger your deposit, and the easier it should be to secure a second loan. Talk to your mortgage broker or mortgage adviser if you’re thinking about growing your property portfolio using the equity in your existing home.
Get in touch
If you’d like to find out more about using the equity in your home to refinance, get in touch with a Mortgage Express adviser.
While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Mortgage Express Limited for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication.
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