Home Equity Explained

Why Home Equity Is Important:

Use More Of Your Own Money & Create Wealth With Your Equity!

Home Equity Defined - Equity is the difference between the current value of your home and how much you owe on it.

If you have been paying off your mortgage for a few years, you will most likely have built up some equity in your property. Your equity is probably your family's greatest asset. Refinancing is a common strategy to be able to access the valuable equity in the home to be able to fund renovations, an investment property, or achieve other goals that you have.

1. Calculating Your Home Equity

Assume 

• You purchased a house a while ago for $750,000, 
• Your deposit was $150,000 (20%)
• Meaning your loan was for $600,000
• Your equity in the home was $150,000

Overtime

• Your home is now worth $900,000
• You have paid off $50,000 (from the principal)
• So – You now owe $550,000
• Meaning your equity is now $350,000

As a percentage: 
You can do this by:

• Subtracting the loan value from the home value
• Then divide the result by the home value and multiply by 100 to get your percentage.

The equation (using the above figures) looks like this:

• = $900,000 Home value - $550,000 Current Loan value
• = $350,000 Equity ÷ $900,000 Home value
• = 0.3889 x 100 (Your equity is 38.89%)

Accessing Equity by Refinancing 
In the above example – You have $350,000 (38.89%) equity in your property.  To avoid lenders mortgage insurance (LMI), in most cases, you can only lend up to 80% of the home's value.

Meaning

• if $900,000 is the current home value
• then 80% of home value = $720,000 (maximum loan amount)
• $550,000 is the amount owed on your current loan
• So, $720,000 (max loan amount) – $550,000 (current loan value owed)
• Available Equity = $170,000 NB: This is the amount of equity you can access without incurring costly Loan Mortgage Insurance (LMI) costs

2. Building Your Equity 

Obviously, it is beneficial to build up your home equity. Building equity is one of the primary financial benefits of homeownership.  There are a few ways to you can build increased equity in your home:

• Making loan payments – By only paying interest on your mortgage, you are not increasing the equity in your home, You need to be paying both your interest and principal.  Over time this progressively increases the amount you are contributing to the principal repayment.  
• Paying larger or faster loan payments – It goes without saying that the more you can pay off your mortgage, the sooner you can reduce your borrowed principal amount.  Also, another method that has a compounding effect is paying your loan repayment on a weekly or fortnightly basis instead of monthly.  This is an easy and achievable way of reducing your principal at a faster rate than monthly payents.
• Home value appreciation – Your equity will also grow in proportion to the amount your home appreciates in value.  Most property appreciates in value over time (although it goes through cycles).  So if your home appreciated in value by $30,000 in the last year, your equity also has grown by $30,000.
• Home improvements & renovations – This is a very good way to accelerate your equity stake substantially.  For instance, some home improvements may increase your home's value by more than the cost of the home improvement.  You may find by spending $30,000 "wisely" your home may increase in value by say $45,000 (that is a 50% ROI - For every dollar you spend you get an extra fifty cents in value - your $1 spend becomes $1.50 in value). NB: Some home improvements are not a good return on investment - so invest wisely!

3. Using Your Equity

You can buy an investment property with your home's equity.

Buying an investment property using your existing home equity is a very popular investment strategy.  By establishing a split home loan (one for investment purposes) using the equity you have in your current home you can use this cash as a means to pay the 20% deposit and costs associated with buying an investment property.  Different lenders will have different rules on this.  So it is important to talk to New Property and Finance for a great home loan and for investment home advice.

New Property and Finance specialises in Building New Property and helping everyday Aussies get a home loan to buy them safely.

RISK MANAGEMENT: Using the equity of your own home to buy an investment property does carry some risks. If you don't use your equity wisely, you could end up losing your home, or worst-case scenario, you could lose both your home and your investment property. It is important that you speak to a New Property and Finance consultant to ensure that you are set up correctly to invest in property safely BEFORE you buy any property.