Having equity in your home means the difference between the value of your property and how much you owe on it. Not only is it a great feeling to see the amount owed on your property decrease, but it also means you might be able to use that equity to increase your loan for things such as renovations, upgrade to a more valuable property or to purchase an investment property.
There are a number of ways to actively build equity in your property – other than making your necessary regular mortgage repayments.
By adding value to your property you are increasing the equity you have in that property. This can be done by making improvements to the property.
The kind of improvements you do and how much you spend will depend on your particular situation. If you are looking to build equity in your property and make money out of it, it’s important you don’t spend more than you can could potentially recoup should you decide to sell, this is known as overcapitalising on your property. It’s important you consider the possibility of overcapitalisation and what that means.
There are many ways to add value to a property. Here’s a list of simple improvements many people consider when looking to renovate:
An offset account operates like a savings account but is linked to your loan account. Instead of being paid interest on your offset account, the amount of interest you pay on your loan is reduced. This can help you pay your home off sooner, and build equity while you’re at it.
Additional lump sum repayments can be an effective way to increase your equity and decrease the amount of interest you are paying on your mortgage. You’ll need to make sure your current loan allows you to make additional lump sum repayments.
If you are making mortgage repayments on a monthly basis consider changing your repayments to fortnightly. Generally, the more often you’re paying funds onto your loan, the less interest you will pay overall. This is because the loan balance is constantly reducing. If you do consider this as an option have a discussion with your lender to find out how to make this work.
If you are refinancing your current home loan, your equity could be used and will be reflected in a lower LVR. This means you could be eligible for more favourable interest rates if you were to refinance to Heritage.
The equity you have in your property can be used as a deposit to purchase a new property prior to the sale of your existing property. This is done by using the equity for things like purchasing a bigger home to fit your growing family. This type of arrangement is commonly referred to as a bridging loan where for a period of time you hold two loans until the original one is repaid in full.
Equity can be used as a deposit to purchase an investment property, while keeping your current property. If you want to avoid paying the additional cost of Lenders Mortgage Insurance (LMI) on your investment property, you'll need to have a 20% deposit. You can get this deposit with equity in your current home by borrowing up to 80% of the value of your existing home. A bit of maths is involved in this calculation, so here's an example to help you.
It's important to remember that this is an example only. Everyone's financial situation is different and there are other factors that contribute to how much you can borrow including market factors, fees and charges and your income. It's best to talk to a Lending Specialist to discuss your own personal situation.
You can find out how much equity you have in your property by having a property valuation done. The valuation must be done by an independent or bank-approved appraiser.
For more information about building equity and how it can be used, talk to one of our lending specialists on 13 14 22 or contact your local branch. This can be a tricky topic so it’s best you fully understand your options.