If you’re a homeowner in Australia, you may have accumulated equity in your property over the years. This equity can be a valuable financial resource, allowing you to fund various goals such as buying an investment property, renovating your home, or even purchasing a new car. Here’s a guide on how to understand, calculate, and utilize your home equity effectively.
What is Equity in a Home Loan?
Home equity is the difference between the current market value of your property and the remaining balance on your mortgage. For example, if your home is valued at $800,000 and you have $400,000 left on your mortgage, your home equity is $400,000.
How to Work Out Your Accessible Equity
Not all of your home equity will be accessible. Most lenders allow you to borrow up to 80% of your property’s value without incurring Lender’s Mortgage Insurance (LMI). Using the example above:
- 80% of your property’s value: $800,000 x 80% = $640,000
- Subtract your remaining loan balance: $640,000 – $400,000 = $240,000
Thus, you can access $240,000 of your equity without paying LMI.
How to Use Your Home Equity
- Investment Property Deposits: One popular use of home equity is to fund the deposit for an investment property. For instance, if you need $100,000 for a new property, you can leverage your accessible equity instead of saving up the cash deposit.
- Home Renovations: Renovating your home can enhance its value and improve your living space. Whether it’s adding a new room or modernizing your kitchen, using your home equity can finance these projects without tapping into your savings.
- Buying a New Car: Using home equity to buy a car can be tempting due to the lower interest rates on home loans compared to car loans. However, be mindful that extending your mortgage to include the cost of a car means you’ll be paying interest on the car for a much longer period, potentially increasing the overall cost significantly.
- Holidays and Other Personal Goals: You can also use your home equity for lifestyle goals such as taking a dream vacation or funding education expenses. It’s important to ensure that these expenses are managed wisely to avoid unnecessary financial strain.
Steps to Access Your Equity
- Assess Your Home’s Value: Get an up-to-date valuation of your property. This can be done through online tools or by hiring a professional valuer.
- Calculate Your Equity: Subtract your remaining loan balance from the current market value of your property to determine your total equity. Then, calculate the accessible equity by considering the 80% loan-to-value ratio (LVR) to avoid LMI costs.
- Consider Refinancing: Refinancing your home loan can help you access your equity. This involves taking out a new loan for the desired amount and potentially switching to a lower interest rate. Be aware of any associated costs such as application fees, valuation fees, and settlement fees.
- Consult a Mortgage Broker: Engaging with a Refinance Solutions mortgage broker can provide you with tailored advice and help you navigate the refinancing process. They can compare different loan options and guide you on the best way to access your equity.
Accessing your home equity can provide you with the financial flexibility to achieve various personal and investment goals. Whether you’re looking to invest in property, renovate your home, or fund other significant expenses, understanding and utilizing your home equity can be a smart financial move. Always seek professional advice to ensure you make the best decisions based on your unique financial situation.
For more detailed information on accessing your home equity, check out our home equity calculator or call us on 1300 110 209
