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Everyone wants more equity and each new slice of equity moves you one step closer to owning your own home. Here we’ll explain what equity is, how you can build equity, and how you can use your equity to fund your next move.
Equity is the portion of a property’s value that an individual owns outright. It is calculated by measuring the difference between the outstanding balance of a home loan and the property’s current market value. For example, if your home is worth $400,000 and you still owe $150,000 on it, then your equity is $250,000.
Equity on a property can fluctuate depending on the market. It's not just the money the homeowner has paid towards the property, it also considers any increase in value made from improvements on the property or if the market value has risen. Equity can be a useful way for property owners to get fast access to a loan with lower interest rates in order to fund a renovation or purchase an investment property.
Use our equity calculator to find out how much equity you could access from your home loan.
The more equity you have, the better your financial position. Here are a number of different ways you can build equity in your home.
Make extra repayments to lower the balance owed on your home loan
Increase the size of your regular monthly repayments
Switching your repayments to fortnightly or weekly instead of monthly can save thousands on interest each year
Increase your property’s value by renovating
Attach an offset account to reduce the amount of interest you pay to your home loan
Actioning any or all of these tips can help you get you closer to owning your property in full
It’s important to remember that access to owner's equity involves meeting certain requirements and criteria. In order to access your equity, lenders will typically request a property valuation to see if your property has increased or decreased in value. Homeowners can often access up to 80% of their current property's equity. How much equity you can access will vary from lender to lender and depends on how much you have already repaid and what you intend on using the funds for.
Speak to a Lendi Home Loan Specialist to find out exactly how much equity you can access and what options are available to you.
Related: Buying your second home? Read our guide to buying again.
Related: Interested in rolling your credit card or car loans into your home loan? Read our guide to debt consolidation.
Related: Thinking of building? Learn more about construction loans here.
Many homeowners choose to use the equity in their home to actually increase the property's value. Equity can be used to fund:
Renovations
Maintenance
Expansion
Purchasing another property
However, homeowners don’t always have to use their equity specifically on their property, it can also be used to:
Purchase/upgrade to a new car
Take a holiday
Settle other debt
Invest elsewhere
A home equity loan, sometimes known as a ‘second mortgage’ or a ‘home equity installment loan’, allows a homeowner to access the equity accrued in their property.
The amount of equity that can be accessed (loan amount) and interest charged is determined by:
The property’s current value
How much of the loan has been repaid
Homeowner’s credit score and personal finances
Purpose of the loan
The current state of the property market
Home equity loans are useful because they allow homeowners to access large sums of money, without needing to sell their property or turn to high interest consumer options. Compared to other home loans, home equity loans are easier to qualify for and lower risk for lenders since the property itself is used as collateral against the loan.
A common reason for accessing home equity is to fund the purchase of a second property. The homeowner can use the cash (equity) withdrawn as a deposit towards the second property. If you’re prepared to make the repayments, then using your equity as a deposit can be a smart move.
Speak to a Lendi Home Loan Specialist to find out exactly how much equity you could access.
Lenders offer different types of home equity loans suited to homeowners with a variety of needs. These include:
Home loan top up: Also known as a ‘cash out’ loan or ‘lump-sum’ loan. This is the most common type of equity loan where the borrower is provided with the full sum of money and then pays it off over set payments for a fixed period of time, with each payment lessening the loan balance. Read more about home loan top ups here.
Line of credit home loan: This allows a homeowner to borrow a specific amount of money from their home loan. The funds sit in a transactional account that the borrower can access whenever they choose. Interest is only paid on money that has been withdrawn from this account. This type of loan acts similar to a credit card.
Renovation loan: This allows a homeowner to access their home equity to fund a renovation that should ultimately increase the property’s value.
Seniors equity loan: Also known as a reverse mortgage, this type of loan releases the equity in a retired person's home loan, with no extra repayments. Interest is added to the loan each month, while the entirety of the loan (both the released equity and the original home loan) will be repaid when the house is sold. This type of loan is only available to those over the age of 60. It comes with a lot of risk and should be carefully considered by speaking to a qualified financial advisor.
Home equity loans ultimately offer homeowners with financial flexibility. There are a number of benefits associated with accessing the equity in a property, such as:
Access to a large amount of money when needed
Pay less interest compared with other loans e.g. credit cards and personal loans
Using the money to renovate can increase the property’s value
Can use the equity as a deposit to buy a second property
The interest can be tax deductible for investors
In order to make an educated financial decision, you should be aware of the risks associated with accessing the equity in your home. These can include:
An increase in the amount of debt owed
It will take longer to repay the home loan
Larger repayment amounts
Potentially higher interest rates
Temptation to use the money for other purposes
Homeowner risks losing the property if they are unable to make repayments
May need to pay fees such as break costs, a valuation fee, legal costs and if you borrow more than 90% LVR you may need to pay LMI (Lenders Mortgage Insurance)
A top up loan, also referred to as an ‘equity loan’ or a ‘cash out loan’, allows homeowners to access the equity accrued in their property in the form of a cash sum. Lenders typically allow property owners to borrow up to 80% of their property’s value. It’s important to note that accessing equity is likely to increase the loan term, meaning it will take longer to pay back your loan in full.
While the equity accessed can be used for any purpose, the lender will typically request evidence for the loan’s purpose if the borrower requests to access $100,000 or more.
Is a top up loan right for you? Learn more about top up loans here.
This will depend on your personal circumstances, your current equity and your property’s value. A line of credit home loan allows a property owner to borrow a specific amount of money from their home loan. The funds can be accessed by the borrower as often as they choose as long as they don’t exceed their limit.
The lower your LVR, the better your chances of being approved for a line of credit loan since lenders will usually only allow homeowners to borrow up to 80% of their property’s value. Line of credit loans are typically used by individuals with inconsistent income streams such as investors, the self-employed, tradies, etc.
It all depends on your personal situation. If you have a significant amount of equity in your property, you can apply for an equity loan to pay for your renovations. You can typically access up to 80% of your current property's equity. How much equity you can access will vary and is dependant on how much of your loan you have already repaid, how much your property is worth and the current property market conditions.
If you are using a licensed contractor for the valuations, you could get a construction loan to fund renovations, the bank will then use an ‘as if complete’ valuation of the property to determine your equity.
Thinking of buying a fixer upper? Read more about construction loans here.
Equity is a great asset and if used correctly can be an advantageous way to get ahead and build wealth, whether it be via investing in a second property or renovating your own home to increase value.