What is equity?
Equity is the difference between the market value of your property and the amount you still owe on your home loan.
It’s important to understand the difference between equity and useable equity. You can’t use all of your available equity.
Since the bank is lending you money against the value of your home, they won’t lend you the full amount. If house prices drop, they don’t want an outstanding loan that’s worth more than your property. Typically they'll lend you 80 percent of the value of the property, minus the debt you still owe on your home. This is your useable equity.
When working out your useable equity, the bank will take into account your income, age, how many kids you have, your additional debts and a host of other factors. Talk to one of our banking specialists to find out more, or use our home equity calculator to get a guide as to how much equity you may have available.
Ways to build equity in your home
Increase the value of your property
Making upgrades to your home by renovating or extending it is a great way to increase the market value of your home. Before you invest a lot of money into upgrading your property however, do your due diligence to avoid overcapitalising.
Get a feel for what prices renovated properties are selling for in your suburb. By doing this you’ll also uncover the style and quality level that your renovation needs to be for the area.
Increase the regularity and/or size of your payments
An obvious way to increase your equity in your home is to reduce your loan balance. If possible make extra repayments or increase the amount you repay each month. You’ll need to check whether this is possible with your current loan. You may face economic costs
if you currently have a fixed rate loan.
Make lump sum payments
If you’re lucky enough to come into a lump sum of money, why not put it straight into your home loan. Again, you'll need to check whether this option is available with your current loan.
Use 100% offset account
Opening a 100% offset account is a good way to increase your equity. Your savings will be offset against your loan balance, to reduce the interest you pay on your loan.
Use home equity to improve your lifestyle or grow your wealth
Renovate your home
Chances are your home may have increased in value since you bought it. You may have also reduced your loan balance over time. If your home needs a facelift and renovations are on the agenda, you can use this increased home equity to pay for it.
To get an idea of how much equity you have, you can use our home equity calculator. Then talk to one of our banking specialists to work out how much you can access for your renovation project.
Being disciplined to stick to a budget is crucial for a successful and stress free renovation.
Invest the money
The equity you have in your home can be a powerful tool for wealth creation. If your property has increased in value, the amount of equity held in that property will have increased too.
You can then use the increased equity as collateral to secure further lending. Rather than saving for years to fund a deposit for another property, you can use the equity you already have to take another step on the property ladder.
In addition to investing in property, home equity can be used to start a business or invest in the share market as a way to meet your financial goals.
But above all, remember to play safe. If you don’t have any funds outside your home equity, then it’d be risky to use every last cent of your usable equity to invest in property. You always need a buffer, some funds in reserve in case things don’t go to plan. Even if it means you can’t invest for a while, it’s important to keep yourself protected.
Contact a financial advisor for more information unique to your situation.
Buy a new car, take a holiday or pay for your child’s education
The equity you’ve built in your home can also be used to pay for the other expenses. If it’s a new car or private school fees, accessing your home equity can be a good option.
Equity facilities can turn the equity in your home into a ready source of funds to use as a line of credit. You can borrow up to your agreed credit limit without having to make further lending applications and you have easy access to your money whenever you need it.
Or, if you prefer, you can access your equity through a set term loan so that the funds are provided to you in one parcel with an agreed repayment structure.
One more thing
Even though home equity release has its advantages, it’s a big commitment and needs to be considered carefully before doing so.
By accessing the equity in your home, it means that the total amount you owe the bank will increase. This can mean high monthly repayments and stretch your budget. It may also increase the length of your loan. Make sure you consider all these factors when making a decision.