It’s easy to think of your home loan as a never-ending series of monthly repayments, but with every payment you make, you’re building up equity in your home and you might just have enough to start putting it to use.
You’ve been dutifully meeting your home loan payments every month for years, even adding a little extra where you can. While it might not seem like it, you could have built up considerable equity in your home, especially if property prices have been climbing in your area.
“Equity is the difference between the current value of your property and any debt that you still owe,” says Peter van der Westhuyzen, Head of Institutional and Direct at Macquarie’s Banking and Financial Services Group.
“If you have a property valued at $600,000 and a loan of $400,000, then you have $200,000 of equity.”
Even if your debt level has stayed the same, the value of your home might have increased (possibly due to rising property values or as a result of home improvements), and with it your equity also.
The good news is, you can access it – without having to sell your home.
Think of home equity as an asset you can use for other financial purposes – whether that's investing, renovating or moving house.
Lenders will often let you tap into your home equity to use as collateral for new loans. This is a very common strategy for property investors. Done right, it can yield great results – as long as you're aware of the risks.
1. Use your equity as a deposit on an investment property
This is one of the better-known uses of equity. 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 place.
Your lender will request a valuation to assess your property’s fair market price. This valuation will then be used to determine what your usable equity is.
Just because you have $200,000 in equity, it doesn't mean you can (or should) access it for this purpose. Lenders will also consider your income, number of children, your general living expenses, debts and other factors. They will typically release up to 80% of your equity, subject to serviceability – in the case of our example, $160,000.
2. Use your equity to renovate your current home
Of course, you may want to use the equity you have in your current property to make some improvements.
“A lot of people withdraw equity for renovation,” says van der Westhuyzen. “Some people may want to add value to their property, or some may need to renovate because of a change in life circumstances.
“For example, they might want to add a bedroom to the property because they're about to start a family or they have a child and want to have a second, and so on. So they're changing the property to suit their current life stage.”
3. Use your equity for other investments
Just because you’ve got equity in your property, it doesn’t mean you need to keep it in property. In fact, if you want to put your equity to work then diversifying into a different asset class is something that could be worth exploring.
“Some of our clients want to withdraw equity for other investment purposes,” says van der Westhuyzen.
“Now, this really falls into the broader category of wealth creation. When it comes to using your home equity for investing, don’t just consider property. You could invest it in the share market, you could buy bonds or you could think about a range of managed funds.“All of these options have different levels of risk attached, but it goes to show the variety of ways you can use the equity in your home to grow your wealth.”
With all of these things in mind, using your home equity to aid your wealth creation strategy can be a smart and rewarding move.
As always, it’s important to speak with your financial adviser before making any decisions, as they can take into account your risk profile, goals and objectives.
- The equity in your home is the difference between the current value of your property and the amount you still owe on your loan.
- You may be able to borrow up to 80% of the equity in your home, subject to serviceability.
- Investing is a common way of making your equity work harder for you – whether it’s investing in property or diversifying into other asset classes.
- Many people use their equity to renovate or make improvements to their home.
Speak with one of our home loan specialists today to discuss accessing your equity. Call 13 62 27.