Your home could be more than just a place to live. If you’ve built up equity, it may also provide an opportunity to support your future financial goals.
Whether you’re planning renovations, looking to upgrade your home, considering an investment property or simply want to understand your borrowing options, knowing how much equity you have can be a useful starting point.
Here’s what you need to know about home equity, how it can be accessed and what to consider before making a decision.
Equity is the difference between your property’s current market value and the amount you still owe on your home loan.
For example, if your home is currently worth $900,000 and your outstanding mortgage is $300,000, you have $600,000 in total equity.
Your equity can increase as you pay down your mortgage or if the value of your property rises. However, not all of this equity may be available to borrow against.
Lenders will generally consider lending up to 80% of a property’s value, less the amount remaining on the existing home loan. This is commonly referred to as your usable equity.
For example:
Borrowing above 80% of the property’s value may be possible in some circumstances, but it can result in additional costs such as Lenders Mortgage Insurance (LMI).
The amount you can actually access will depend on factors such as your income, expenses, existing debts, loan structure, credit history and the lender’s valuation of your property.
For many homeowners, equity can provide greater flexibility when planning for significant expenses or future investments.
Depending on your circumstances, you may be able to use your equity to:
For example, accessing equity could help fund a kitchen renovation without relying entirely on your savings. Alternatively, it could contribute towards the deposit and purchasing costs of an investment property.
Some homeowners choose to access their equity to consolidate higher-interest debts, such as credit cards or personal loans, into their home loan.
This may simplify repayments and potentially reduce the interest rate applied to those debts. However, extending a debt over a longer loan term can increase the total interest paid over time.
Debt consolidation isn’t suitable for everyone, so it’s important to consider the costs and longer-term implications before proceeding.
There are several ways you may be able to access equity in your property. The right option will depend on your circumstances and what you’re planning to use the funds for.
Top-up loan: You may be able to increase your existing home loan and access additional funds as a lump sum.
Loan split: Your lender may allow you to create a separate loan account for the additional borrowing. This can make it easier to keep funds used for different purposes separate from your original home loan.
Refinancing: Refinancing involves replacing your existing home loan with a new loan. Depending on your circumstances and available equity, this may allow you to access additional funds while also reviewing your interest rate, loan features and overall lending structure.
Line of credit: A line of credit provides access to funds up to an approved limit. Rather than receiving the full amount upfront, you can generally draw down funds as required and pay interest on the amount you use.
Each option has different costs, features and risks, so it’s worth comparing them before deciding how to proceed.
While using equity can provide access to additional funds, it also means taking on more debt.
Before moving forward, consider:
Your repayments: Additional borrowing will generally increase your loan balance and repayments. Make sure the repayments remain manageable within your budget.
Interest rates: Changes in interest rates can affect your future repayments, particularly if you’re borrowing a significant amount.
Your borrowing capacity: The amount of equity you have doesn’t necessarily equal the amount you can borrow. Lenders will also assess your income, expenses, existing debts and overall financial position.
Your property as security: Your home is generally used as security for the loan. If you’re unable to meet your repayments, there can be serious consequences, including the risk of losing your property.
A Mortgage Broker can help you understand how accessing equity could affect your overall lending position and compare options that may suit your circumstances.
Your property’s value plays an important role in determining how much equity you have.
When property values increase, your equity may grow even if you haven’t made significant additional repayments. Conversely, when property values fall, the amount of equity available to you can decrease.
The impact will vary between homeowners. Someone who has owned their property for several years and consistently paid down their mortgage may still have substantial equity even if property values have softened.
Recent buyers with smaller deposits or higher loan balances may have less of a buffer if property values decline. In more severe circumstances, a homeowner can enter negative equity, where the outstanding loan balance is greater than the property’s market value.
If you’re considering accessing equity, it’s important to understand your property’s current value and how changes in the market could affect your borrowing position.
Working out your usable equity isn’t simply a matter of subtracting your home loan from your property’s estimated value.
Your lender will generally require a property valuation and your borrowing capacity will also be assessed based on your financial circumstances.
A Mortgage Broker can help you understand your current position, estimate your potential usable equity and compare suitable lending options.
If you’ve built up equity in your home, it could provide an opportunity to support your next financial goal.
Whether you’re planning a renovation, purchasing an investment property, consolidating debt or simply want to understand what options are available, we can help you assess your position and explore your lending options.
Get in touch with our team today to discuss your goals and find out how much usable equity you may have available.
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