Find out how much equity you have so you can improve your finances and your life.
Unlocking the equity in your home is a great way to get financing for other investments or even just to enjoy your life. Equity is the balance between the current value of your home and the amount you have borrowed against it. The equity in your home is of great value because you can often get access to it through your home loan or a line of credit to pay for a variety of projects and purchases, such as home renovations, the purchase of a new car or purchase of an investment property or other asset.
Building equity in your home can also help you reduce the amount of monthly repayments you make towards your mortgage, freeing up your money for other investments. This article will focus on how to calculate your equity and use it to your advantage.
How to calculate your equity
Calculating the equity in your home can help you figure out how much you can redraw on your current repayments or how much you can get as a credit increase using your home equity as security. Calculating the equity in your home is pretty easy; you just need to work out the difference between your property value and how much you owe on it.
Equity = Property value - Loan amount still owed
In order to calculate the value of your property, you need to estimate the value of your home by using lists of recent sales in your suburb. This will help you compare the prices of similar properties recently sold in that location so as to get an idea of how much your property could be worth. If you use a professional valuer (which your lender will usually organise), you can also get an accurate estimate of how much your property is worth.
You will also need to find out your loan balance by contacting your lender or checking your home loan statement to determine the principal amount still left to pay.
Comparison of line of credit home loans
What are the benefits of knowing how much equity you have?
Finding out how much equity you have in your home is of great importance. Equity in property is an asset, and knowing how much you have can help you make sound investment decisions and calculate the amount of extra money you can borrow on your current mortgage using your home equity as security. Here are some things you can do using your home equity:
- Finance home renovations. Your home equity can be used to get credit increases on your mortgage without taking out a separate loan. The extra money you get can be used for that home renovation you have been putting off due to lack of finances. You may also use the equity to apply for an additional loan and use the funds to purchase a new car or other investments.
- Accessing your repayments. Making extra payments on your home loan allows you to build extra equity in your loan, and you can later redraw these payments from your lender for some extra funds you can use for a holiday or other urgent need.
- Building wealth. Unlocking the equity in your home can help you improve your lifestyle by enabling you to invest in property. Equity in your home can be used to as security for other investments in rental property that would further provide you with investment security and capital growth, enabling you to accumulate wealth.
Things to consider when accessing your equity
The equity in your home can be beneficial if used correctly. However, there are a few factors you should take into consideration before accessing your equity so as to avoid financial difficulties or unexpected expenditure. Here are the four things you need to consider:
- Increase in monthly interest. Accessing your home equity to get an additional loan or credit increase has the effect of increasing the amount you owe to your mortgage provider. This will most likely end up increasing the amount you are required to pay in monthly interest.
- Increase in monthly payments. Using your equity to get additional funds for a home renovation or car loan increases your outstanding mortgage amount significantly without increasing your loan repayment term. This will mean that your minimum monthly repayments can rise, so proper budgeting is required so as to avoid financial difficulties.
- Making additional repayments on your loan. Accessing your equity to get a credit increase or redrawing your repayments can increase the principal amount on your mortgage. Some lenders may restrict the amount of extra payments you can make if your mortgage has a fixed interest rate, affecting your ability to pay off the loan in the stipulated time.
- Increase in your Loan-to-Valuation Ratio (LVR). If your property value hasn’t increased significantly when you get a redraw or credit increase, your LVR may increase, forcing you to take out Lenders’ Mortgage Insurance (LMI) that will further increase your loan amount.
For these reasons, it’s always wise to visit a mortgage broker or financial advisor before accessing your equity. For many Australians, our home is the biggest asset we’ll have, so you should only access your equity once you’ve been made fully aware of the risks.
How to access your equity
The funds released from accessing the equity in your home can be used for many different purposes. Here are three simple ways via which you can access your home equity:
Redraw. The simplest way to build your home equity is to make payments above your minimum monthly repayments. You can then access a portion of this equity by redrawing the extra funds you have been paying whenever you need to. Redraw restrictions may apply depending on your mortgage lender.
Refinancing. The equity in your home can be used to get you additional funds in two ways. Firstly, you can apply for a credit increase with your bank, which is added to your current loan. You can also opt to take out a separate loan with your home equity while retaining your current home loan. This can be a good option in case you don’t qualify for a credit increase due to your mortgage having a fixed interest rate.
Home equity loan/line of credit loan. A line of credit is a loan applied for using your equity. For example. if you have $500,000 in equity in your home, you can apply for a line of credit home loan for this $500,000 (or a smaller amount as you see fit), and if approved, can access this equity. A home equity loan allows you to withdraw small amounts or the whole balance whenever you like, and charges interest only on the amounts withdrawn.