Home equity explained
Home equity is simply the difference between your property's current market value and your outstanding mortgage balance.
For example... Let's assume your home value is $650,000 and you still owe $400,000 on your mortgage. When you subtract the loan balance from your property value, you will have equity of $250,000.
Your home equity can increase overtime as you pay down your mortgage while your property grows in value.
How can I use my home equity?
There are a number of ways that home owners may take advantage of their available home equity including the following:
- Buying an investment property - If you're looking to purchase an investment property, you can avoid the deposit-saving process (or selling your home) by using the equity in your existing home. This is one of the better-known uses of equity.
- Renovations - Some may withdraw equity for renovating their home. This may be to increase value or because of a change in life circumstances.
- Consolidating debt - Some may use available equity to refinance and consolidate existing debt into their home loan. This may help to reduce debt repayments, however, the biggest drawback to consolidating smaller debts into your mortgage is that you’re stretching these short-term debts over a much longer term. Always discuss this strategy with your Bank or Broker first.
- Guarantee your kids home - Some parents will use their equity as security towards their children's home. As a guarantor, you could help your loved ones to secure a home with little to no deposit.
Calculating useable equity
Usable equity is the equity in your home that you can actually access and borrow against.
First and foremost, you will need to obtain a current bank valuation for your home. This is generally free and we can arrange it for you.
Once you know your homes value, you can work out the usable equity available by calculating 80% of your property’s current value minus what is still owing on the mortgage.
For example... Let's assume your home value is $650,000. The value of your property at 80% will be $520,000. If your mortgage is $400,000 then your available useable equity will be $120,000.
Keep in mind that even if you have enough equity built up, some lenders may not always allow you to access it. They may take into account other factors such as your income, age, employment, family status, and additional debts.
Investing equity in property
Leveraging the equity in your home to invest can be a great way to expand and diversify your property portfolio.
The main advantages of property investing include:
- Security and stability - All people need a place to live — therefore, properties are almost always in demand. This makes real estate generally a more secure and stable investment vehicle compared to others.
- Rental income / cash-flow - Given the demand for housing, an investment property can provide a steady stream of passive income, especially if the rental income is more than the monthly repayments and maintenance costs combined.
- Tax benefits - There are some major tax advantages that comes with property investing through depreciation and the costs involved related to your investment. This can help to significantly reduce your tax bill.
- Long-term growth - Over time, the value of your investment property can increase, along with your rental income, particularly if the property is in a high-yield area. Growth in value and income, can create further opportunities.
Invest today
We can help you to find out how much equity you have in your home, and how you might be able to use it to own an investment property sooner. To get started, simply complete our free assessment form online.
