If you own a property, you may have heard of the term ‘home equity’. Understanding what it means, and how you can use it, can help you make the most out of your property.
What is home equity?
Home equity is the difference between your property’s current market value and how much you still owe on your mortgage.
For example:
- If your home is worth $600,000
- And you still owe $400,000 on your mortgage
- Your equity is $200,000
This equity grows over time as you pay off your loan and as your property increases in value.
How is equity calculated?
Your equity = your home’s market value – your loan balance
Lenders will look at your Loan-to-Value ratio (LVR) to decide how much equity you can access. Your LVR represents the percentage of your property’s value that’s currently owed on your home loan. For example, if your LVR is 80%, you have 20% equity in your property. Usually, you will need at least 20% equity before you can access it for other purposes.
A great way to discover your property’s estimated market value is with a FREE Property Report.
What can you do with your home equity?
There are several ways you can use your home equity:
- Renovations: Fund upgrades like a new kitchen or bathroom or improve your energy efficiency with solar panels or insulation. These refurbishments could increase your property value over time – increasing your equity.
- Investment: Use your equity as a deposit for another property.
- Guarantee: if you agree to be a guarantor, your property could be considered as a security which can assist a family member with their borrowing power. Find out more about Family Guarantee.
- Buy a vehicle: Purchase a car or even a caravan or boat for travel.
- Major expenses: Pay for big expenses such as medical costs, education.
How can you grow your home equity?
There are a few ways to build your home equity over time:
- Make extra home loan repayments: Making more frequent repayments reduces your loan balance more quickly. For example, moving from monthly to fortnightly repayments gives you an extra repayment each year (12 monthly payments in a year versus 26 fortnightly payments).
- Utilise an offset account: An offset account is available for many variable loans and acts like an everyday bank account (you can deposit or withdraw as much as you like). The difference is that an offset account is linked to your home loan and the money in these accounts can help reduce the amount of interest charged on your loan. Paying less interest means that you may be able to pay off the principal amount faster, building more equity over time.
- Increase your property’s value: Renovations, extensions or simple upgrades can boost your home’s value.
- Refinance: an increase in equity may put you in a position where you could switch your home loan to a lower rate which could potentially save you thousands over the life of your loan.
Things to consider before using equity
While using equity can be useful, it also increases your loan balance. This means higher repayments and more interest over time.
Before making a decision it’s important to:
- Check if you can comfortably manage the repayments
- Compare loan options and interest rates
- Seek professional financial advice.
Frequently Asked Questions
- What’s the difference between equity and LVR?
Equity is the value you own in your home after subtracting what you still owe on your loan. LVR is the percentage of your loan compared to your home’s value. This is used by banks to measure risk. For example, an 80% LVR, means you have a deposit of 20% the value of the property.
- How much equity do I need before I can use it?
Usually, you will need at least 20% equity before you can access it for other purposes.
- Does using equity increase my repayments?
Yes in most instances. When you borrow against your equity your loan balance increases. If you keep your loan term the same after accessing equity, your repayments will increase because you’re paying off a larger loan over the same timeframe. This may also mean more interest overall.
If you want to have lower repayments you can negotiate with your lender to extend your new loan over a new term to keep repayments low but this will mean you pay more interest over the life of the loan.
If you’re interested in leveraging your home equity, get in touch with Police Credit Union today. If you already have a loan with us, we can work with you to achieve your next goal. Otherwise, refinancing to us means you could unlock a competitively low home loan rate, whilst also potentially saving thousands over the life of your loan as we don’t charge any monthly or annual fees and have highly competitive rates.
View our home loans, apply online, visit your local branch or call us on 1300 131 844 to find out more.