Equity – a homeowner’s best friend!

Put simply, equity is the difference between your current property’s value and your remaining mortgage balance.

A huge benefit of owning your own home is increasing the equity in your property every time you make a mortgage payment. Over time, the equity you build can create opportunities for you to increase your wealth even further.

How can you build your home’s equity?

1.  Paying off your home loan
Provided you are paying off the principal on your loan, every time you make a mortgage repayment, the equity in your home increases. Selecting an extra repayment facility as a feature of your home loan can also allow you to pay off your mortgage and increase your equity faster.

2.  Adding value to your home
Strategic renovations to your property are an excellent way to increase your property’s value, which also raises its equity. You may even use a home loan to fund your renovations by tapping into existing equity.

3.  Letting the market do its thing!
The current market has a huge impact on how much value your property gains, and therefore how much equity you gain. While property values can rise quickly (as in the early 2020’s) or fall (as in 2022), historically over the long term, values tend to go up.

Calculate your property’s equity

The Nectar home equity calculator estimates the amount of equity a lender would allow you to use as a deposit towards an investment or other property purchase, called ‘usable equity’. Using equity for a new loan usually requires a property valuation, so get in touch with us if you’d like help organising one.

How to use equity in your home

Renovate: You can use equity in your home to apply for a loan to renovate your home. Doing this can not only make your house look nicer, but it can also raise the overall value of the property.

Refinance: As you pay off your loan and your property appreciates in value, your loan-to-value ratio (LVR) decreases. In general, the lower end of interest rates are available to borrowers with lower LVRs, increasing your chances of refinancing to a lower rate and saving through reduced repayments.

Consolidate debt: Consolidating debts can help you manage your finances more easily. If the equity in your property is high enough, you may be able to consolidate all your smaller debts into your home loan. This means you could make one larger repayment instead of repaying in several smaller chunks, simplifying your finances and saving on interest.

Invest: You may be able to use equity to purchase a business or investment property. The higher your equity, the less deposit you may be required to put forward – in some cases you won’t need a cash deposit at all!

Pay for lifestyle expenses: You can also use your home equity to fund a range of personal expenses, including a child’s education, a new car, a wedding, or a holiday.

Release a parental guarantor from your loan: If your parents have helped you buy your first home by using their property as security, the faster you build equity, the faster you can refinance to a new loan and give them their title deed back!

How do home equity loans work?

An equity loan, commonly known as a second mortgage, is a term used when talking about a loan that uses a property’s equity as collateral or security. The loan can be used to borrow funds for different purposes, including investments, personal purchases, to establish a line of credit and more.

When you use equity to purchase another property, such as an investment property, a new loan is drawn up. Both the new property you will be buying and another property that you already own can be used as security for that loan.

When you use equity for a personal use, which does not involve purchasing property, you might do so by establishing a line of credit in your existing mortgage. Here, a credit limit is set, and you can continue to draw funds from the equity until you reach that limit cap.

Before applying for a home equity loan, Nectar recommends speaking to one of our expert local mortgage brokers to find out what kind of loan best suits your purposes and situation. Each lender will have their own options, but broadly speaking home equity loans come in two types:

1.  Lump sum
This works similarly to a mortgage loan. Here, you borrow an approved amount or lump sum and make whatever repayments are required over your loan term.

2.  Line of credit
You can also use your equity to create a line of credit against an existing loan. A maximum credit limit will be established, which you can draw funds from. You can borrow funds as needed and your loan repayments will increase based on the additional amount withdrawn.

Advantages of a home equity loan:

  • Thanks to the security of the borrower’s property, interest rates are generally lower than other types, like credit cards or personal loans.
  • Funds received can be used for multiple purposes, giving you more flexibility.
  • They allow borrowers to utilise their property’s equity, which can then be used for other investments. This in turn may open up more opportunities for the borrowers.

Disadvantages of a home equity loan:

  • Borrowers need to be careful to manage their money with this type of loan, as you are incurring more debt and increasing your repayments.
  • This loan type will attract different kinds of lender fees and charges.

The right valuation makes all the difference!

If you plan on using your property’s equity, then you will need to get a property valuation. In order to take full advantage of your equity, you will want the valuation to be as high as possible. You should note that banks use different valuers, and they might value your property differently.

As a rule of thumb, the standard amount of equity lenders allow as a deposit is 80% of the value of your existing property, minus the remainder of your home loan.

If you get a lower-than-expected valuation, you may want to request another, otherwise you’re borrowing capacity will be limited, and your ability to complete your plans.

To give you a better idea of how this might work, consider this hypothetical example.

To purchase a $1,000,000 property in 2010, Jason took out an $800,000 home loan. Ten years later, his loan balance is now $500,000 and he wants to use his equity to invest in a new property.
His current bank’s valuer tells him his house is now worth $1,600,000. The bank said that as per their policies, the maximum equity Jason could access would be $780,000, without paying Lenders Mortgage Insurance (LMI).

($1.6M x 80% minus $500K remaining loan = $780K).

Jason, wanting a second opinion, decides to go to a mortgage broker. The broker organised a second valuation of the property with another lender, which came in at $1,800,000. The lender then said that as per their policies, Jason could access up to $940,000 in equity, without paying LMI.

($1.8M x 80% minus $500K remaining loan = $940K).

In this case, Jason went with the second valuer’s estimate as it gave him greater options for investment property.

If you’re thinking about getting your property valued, getting an equity loan so you can invest or just looking for some advice about home loan requirements, don’t hesitate to drop us a message. We are always here to help you.