You make your mortgage payment on time. You take pride in your home, with scented candles and remembering to change the oven clock when daylight saving ends. Good news: you’ve probably accrued some equity.
What is equity?
Equity is the difference, in dollars, between how much you owe (your home loan) and how much your home is worth. So, if you’ve paid down your loan to $250,000 and your home is worth $550,000, that’s $300,000 in money that’s yours – not the bank’s.
How does equity work?
You can build up equity in two ways. The first is by paying down your loan. The more you pay down your home loan, the less debt you’ll have and the more equity will increase. Win-win!
The second way equity builds up is when your property increases in value. This may happen naturally over time or you can boost your property’s value by making renovations and improvements to your home. New swimming pool, anyone?
So, how can you access the equity in your house and put it to good use? Let’s find out.
1. Find out how much equity you have.
This is a pretty important step. First, you’ll need to have a property valuation done. A valuer will come to your home and look at things like the condition of your property, how big it is, where it’s located and how many kinds of cereal you have. Then, find out the remaining balance of your home loan, grab your calculator and BODMAS it up (alternatively, there are some handy valuation tools online that are free to use too). The difference between the two numbers is your available mortgage equity.
2. Know what you want to use it for.
Even though it can seem like free money, the equity in your home is the result of your hard work. Think carefully about how you might spend it to add value to your existing home, or improve your lifestyle in ways like:
Renovations or refurbishments on your existing home
So much room for activities! Along with reigniting your love for your home, undergoing some renos is a good investment. Whether it’s an extension, a new kitchen (or, hey, remember that pool we mentioned earlier?), putting your home equity towards a refurb can potentially increase the value of your property.
Investing outside of property, like in shares.
Contrary to popular belief, you don’t have to be Leo DiCaprio in Wolf of Wall Street to get into the share game. Some people use their home equity to invest in the share market. Of course (as we’ve learnt from Leo), there are risks involved. If you’re keen to learn more, pull up a seat in our investing classroom.
Putting down a deposit on an investment property.
Or, your home equity could help pay for a deposit for another property. Think of it like using the seeds from your apple to plant an apple tree. Using your equity may even mean you don’t need to save for a cash deposit.
Buying a new car, or taking the fam on a holiday.
The benefit of using your equity to buy a new set of hot wheels is that you don’t have to find a broker or lender to help with the finance once you have access to the funds. It could be time to go get that dream car or have a white Christmas overseas!
Sounds pretty good, right? Well, it’s important to remember: any equity you spend will add to the cost of long-term interest on your home loan. Before you run off to the showroom or browse flights, check out the pros and cons of unlocking your home equity here.
3. Redraw from your loan.
If you’re ahead with repayments, you might be able to use redraw to dip into your equity. That means accessing the extra capital you’ve paid down, not the entire balance of your equity, so you’re limited to the value of those additional repayments. That may not be enough if you’re planning something big like a home renovation.
You could also consider a loan top up. This means getting in touch with your lender and asking to increase the balance of your loan, then using that money to further invest.
4. Refinance your home loan.
Refinancing your home loan to access equity can be great for two reasons:
1. You can tap into the funds you need.
2. It’s a chance to secure a better deal than your current home loan.
Yes, refinancing does take a bit more effort than asking a kind billionaire, but it could mean savings with a lower rate, better loan features or just the pleasure of a great new lender.
5. Avoid putting yourself under financial stress.
What is home equity? The total value of the property that you actually own. What is it not? Play money. You know when you were a kid and you had five dollars and you wanted to spend it so badly your whole body hurt? But your parents made you save it so you could ‘learn’.
Just because you have equity, doesn’t mean you have to use it. Your access to it will depend on your current income, financial history, living expenses and the amount owing. There may also be additional fees associated, and of course, using your equity means your home loan balance will increase.
Manage rate rises with ME
Get tips, tools, and support to manage your home loan as rates rise.
Learn more
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.