If utilised correctly, home equity can be an extremely useful financial asset. However, many homeowners overlook the value of equity sitting in their property, failing to understand how they can use it to their benefit.
Fortunately, we're here to explain all you need to know about home equity, including how to access it and the different ways to use it to your advantage.
What is Equity in Property?
Home equity is the difference between the current value of your property and the remaining balance left on your mortgage.
In other words, you can think of home equity as the portion of your property you own outright. Although, home equity can be much more than just an indication of the dollar value you hold in your property.
Equity also acts as an asset you can use to borrow against or cash out when needed, making it an extremely useful tool when looking for financing options.
How Does Home Equity Work?
Your equity depends on two critical factors, these being your:
- Outstanding loan balance
- Property's current market value
Accordingly, you can expect your equity to grow as you pay off your loan amount over time, alongside your home's gradually increasing property value.
In fact, if you've owned a property for some time, there's a possibility that you've already built up some equity.
How to Calculate the Equity in Your Home
Calculating how much equity you have in your home is a relatively easy task. All you need to do is take the estimated market value of your property and deduct it from your outstanding loan balance.
As a rule of thumb, we recommend taking 80% of your property value to ensure that you don't overstretch yourself financially and end up paying Lenders Mortgage Insurance.
80% Current Property Value - Mortgage Balance = Home Equity
For example, if your current property value is $1,200,000 ($960,000 at 80%) and you owe $500,000 on your existing mortgage, you would have $460,000 total equity.
If you're struggling to figure out your home equity, there are a plethora of online resources that offer a home equity calculator to help you.
How to Use the Equity in Your Home
While there are several ways to leverage your existing home equity, the two most common methods are:
- Borrowing against existing equity: You can leverage your equity to take out a separate supplementary loan that suits your financial needs, such as home equity loans.
- Refinancing home loan to access equity: Ideal for when you need a boost in liquidity, this requires you to refinance your home loan to cash out existing equity.
The option that you choose will depend on your personal objectives. In most instances, homeowners are motivated to access their equity to help them secure an investment property sooner, fund home renovations or finance investment opportunities.
Below, we discuss how you can use your home equity for these specific purposes.
1. Property Investment
If you're looking to invest and buy a second property, you can use your equity to help increase your deposit or take out a separate investment loan. In this process, your lender will typically request a valuation to assess the property's market price before determining your usable equity.
<a href="https://www.joust.com.au/blog/buying-second-home-with-equity" class="button" style="color:#fff; font-weight:1000; margin-bottom:32px;">Learn More About Buying a Second Home with Equity</a>
2. Home Renovations
Commonly people withdraw equity to help fund their dream home improvements. This is commonly achieved by refinancing your home loan to increase the loan amount and cash out your equity, which can accordingly be used to finance your renovations.
Additionally, you could borrow against your equity to take out a home renovation or line of credit loan.
<a href="https://www.joust.com.au/home-loan-refinancing/renovation-refinance" class="button" style="color:#fff; font-weight:1000; margin-bottom:32px;">Understand More About Refinancing for Renovations</a>
3. Other Investment Opportunities
You don't have to keep your home equity within the property market. Many investors like to access their home equity to finance other investment opportunities, such as buying bonds and shares or buying into managed funds. You can achieve this by topping up your loan to tap into your existing equity, providing that needed cash boost to start investing.
All these investments come with different levels of risk, but using your home equity for your other assets can be a rewarding move to diversify your wealth portfolio.
How to Access Equity in Your Home
If using your home equity sounds like an appealing option to fulfil your goals, we recommend following our 5-step approach to ensure the best results:
- Reflect on why you want equity
- Calculate your equity
- Assess cost of accessing equity
- Approach your lender
- Loan application and settlement
1. Reflect On Why You Want Equity
The first and most critical step is assessing why you want to access your home equity. This will help determine which method you will use to secure the equity.
For example, if you want to use your equity for home improvements, you would need to consider if you're going to take out an additional renovation loan or top up your existing loan.
If you know why you want to access your equity but need help with how to go about it, reach out to a financial adviser for assistance.
2. Calculate Your Equity
Following this, you will need to calculate your useable equity. As previously stated, lenders will let you borrow up to 80% of your current property value deducted from your outstanding loan amount. This will help you avoid paying Lenders Mortgage Insurance (LMI), which can be costly for most homeowners.
Additionally, it is important to note that lenders will consider your Loan-to-Value Ratio (LVR), income level, living expenses, age, and any other liabilities before approving your equity access. re
3. Assess Cost Accessing Equity
While accessing equity can be a fantastic way to finance a range of goals or objectives, it can be costly at times. Therefore you must assess the cost of accessing equity to determine whether it is financially viable.
For example, if you want to increase your loan amount to access your equity, you will need to consider the refinancing costs involved.
Additionally, it is important to research the market and reflect on the current home loan interest rates. If you decide to borrow against your equity during periods of high-interest rates, you could face inflated repayments that may prove financially detrimental.
Therefore, we recommend weighing any costs you may face when accessing equity with the current market state before committing.
4. Approach Your Lender
Once you've determined that accessing your home's equity is a financially viable and beneficial option, approach your lender to flag your interest.
'During this phase, we also recommend researching the home loans market to see if other lenders are offering better rates or more favourable conditions. This will help ensure that you secure the best possible deal when accessing your home equity.
If you want to scrape through the market to find the best lender, try using our online home loan marketplace. It's completely free to use and connects you with multiple lenders that match your personal circumstances and goals.
<a href="https://www.joust.com.au/marketplace" class="button" style="color:#fff; font-weight:1000; margin-bottom:32px;">See Our Online Home Loan Marketplace Here</a>
5. Loan Application and Settlement
Once you have decided on the loan option, you can start with your application. You can expect your lender to conduct their own property valuation during this process.
After everything is settled and you're approved, you can expect your equity to be paid in one lump sum or over several instalments, depending on your chosen method.
How to Increase Equity in Your Home
If you've calculated your home equity and are unhappy with the final figure, there are some strategies you can consider to increase your stake.
Increasing Property Value
In theory, when following property market trends, we can state that the longer you own a property, the higher its value will be. Consequently, over time your equity will naturally grow as your property value grows with the market.
However, you can further facilitate your property's market value through strategies such as home improvements.
Renovations like kitchen enhancements, new flooring, landscaping, and windows could all boost the value of your home, consequently increasing your equity.
To get a better idea of how much you would gain from particular renovations, consult a property valuer and determine if renovations are worth spending your money on.
Paying Off Mortgage
You can also build equity by paying off your existing mortgage and making additional loan repayments. However, before deciding to reduce your loan amount, you should determine if you can make extra repayments financially feasible.
Your loan type may also restrict you from paying off your loan faster. For example, if you are on a variable-rate home loan, your lender will allow you to make extra payments without penalty. This may not be the case for a fixed-rate home loan.
Additionally, it is important to consider the market value of your property; if the market forces are driving down property prices, then paying off your loan quicker may not increase equity.
If you want to reduce your loan, we recommend seeking financial assistance to determine if you can meet extra repayments.
Is Using Equity in Home a Good Idea?
Taking an equity loan is a crucial financial decision; like any other loan option, there are risks. Accordingly, assessing your options and deciding if unlocking your home equity will result in a net financial gain is essential.
Moreover, you should understand the unfavourable outcomes if you try to access your home equity without the ideal financial profile.
Such outcomes could be:
- Unsuccessful application: Just because you have home equity does not guarantee approval. If your credit report reflects unsafe borrowing habits you could face rejection from your lender and further decrease your credit score.
- Extra debt: Accessing equity means adding extra debt. Remember that using your equity for any means would translate to increasing the total amount owed on your mortgage and the time it would take to pay it off.
- Other associated risks: There can be unforeseen circumstances that may unfavourably affect you. For example, defaulting on your mortgage payments would also negatively affect your credit score. Make sure you avoid ending up in a negative equity situation, where the total mortgage owed on your property is higher than the total value of the property.
1. Unsuccessful Application
Just because you have home equity does not guarantee approval. If your credit report reflects unsafe borrowing habits you could face rejection from your lender and further decrease your credit score.
2. Extra Debt
Accessing equity means adding extra debt. Remember that using your equity for any means would translate to increasing the total amount owed on your mortgage and the time it would take to pay it off.
3. Other Risks
There can be unforeseen circumstances that may unfavourably affect you. For example, defaulting on your mortgage payments would also affect your credit score. Make sure you avoid ending up in a negative equity situation, where the total mortgage owed on your property is higher than the total value of the property.
How Joust Can Help You Unlock Home Equity
Our Instant Match tool helps you access various flexible home loan options to find the one tailored to your needs. So, whether you're looking for a loan or to refinance, Joust can help connect you with a suitable option at comparatively lower interest rates.
Just answer some basic questions and get ready to compare the three lowest-rate home loans matching your requirements.
Note: The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.