You’ve paid your home loan repayments on time every month for years, even adding a little extra where you can. While it might not feel 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, for example, If you have a property valued at $400,000 and a loan of $280,000, then you have $120,000 of equity.
Even if your home loan has not move much, the value of your home might have increased (possibly due to the increase in house prices or as a result of home improvements), and with it your equity also.
Think of 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 equity to do other things. This is a very common strategy for property investors. Done right, it can produce great results – as long as you're aware of the risks.
This is one of the better-known uses of equity. If you're looking to purchase an investment property, you can put together your next deposit (without saving one 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 $120,000 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.
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 renovations. Some people may want to add value to their property, or some may need to renovate because of a change in life circumstances, or to get a better lifestyle like by adding a pool.
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; or they might want a better lifestyle by putting a pool in their backyard. So they're able to change their property to suit their life which is often cheaper then moving house.
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.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 making contributions to your Superfund. 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 increase your wealth creation strategy can be a smart and rewarding move.
As always, it’s important to speak with your accountant or financial adviser before making any decisions, as they can take into account your risk profile, goals and objectives.
Speak with your Go Mortgage Broker today to discuss accessing your equity. Call us now on 1300 855 244