In this post, I’m going to show you EXACTLY how to work out your usable home equity.
In fact, this is the exact process to calculate your personal net worth!
So if you want to calculate your home equity, you’re in the right place.
Let’s dive right in…
Calculate Your Home Equity 👇
- Home Equity Basics
- Why does Equity matter?
- Practical ways to build equity
- Why is equity different on my home compared to an investment?
- How can I access my equity?
- What banks have the best Equity loan?
- My favourite home equity strategy
- Should I use my home equity?
Home Equity Basics
Simply put, home equity is your personal interest in a property. It increases over time as you pay down your home loan, or if your property value goes up.
In other words, equity is the value of your property which you own – calculated as the property value, minus your home loan.
A quick example…
Let’s say you bought a home for $500,000 and put down a $100,000 deposit, meaning your home loan is $400,000…
- 🏠 Purchase Value (today): $500,000
- 🏦 Home Loan (today): $400,000
- 🤑 Equity (today): $100,000
Your equity is the part you contributed, so even though the property is worth $500,000 your equity is only $100,000 ($500k value -$400k loan).
The exciting part comes if the home’s value increases, let’s say 5 years after you bought it the value increased to $700,000 and you had also paid down the loan to $350,000…
- 🏠 Purchase Value (+5 years): $700,000
- 🏦 Home Loan (+5 years): $350,000
- 🤑 Equity (+5 years): $350,000
Your equity has grown to $350,000 ($700k-$350k) and the LVR of your loan has reduced to 50%!
Dollar dollar bills 💸
Why does Equity matter?
You should think of Equity as an asset, and it ultimately forms part of your personal net worth.
It is possible to take part, or complete withdrawals (sometimes called ‘cash out’) from your property in the future for a range of reasons including buying your next home, funding your retirement or even renovating the current home.
More on this in a minute, let’s look at ways to increase your equity…
Seven Ways to Build Your Home Equity
As the example above showed, increasing your home equity is an AWESOME thing.
(I mean, who wouldn’t want $350,000)
But… how can you make this happen faster?
We’ve put together a separate guide on Ways to Create Equity (faster).
But the TL;DR version of it is…
- ✅ Get another bank valuation – We have seen up to $130,000 differences between different bank valuations, it’s worth getting a second (or sometimes third) opinion on your property’s value.
- ✅ Put down a bigger deposit – While this one isn’t always possible, putting down more deposit automatically gives you more equity and potentially lowers your loan repayments!
- ✅ Get a shorter loan term – This little gem can help you give you some forced savings, by reducing your loan term you will be paying your loan off years faster. What this practically means is your loan repayments will be higher, and you will build equity much quicker.
- ✅ Fix up your property – From basic renovations to adding extra rooms it’s incredible the difference a coat of paint can make to the value of your property!
- ✅ Pay more on your repayments – Without needing to shorten your loan term, making extra repayments has the same effect in that you will be paying your loan down quicker, reducing the mortgage balance and increasing your equity!
- ✅ Use bonuses and tax refunds – When you don’t want to both changing the loan term, or maybe don’t have enough spare cash to increase your repayments you can use your annual tax refunds or bonuses to pay down the loan quicker.
- ✅ Use one partner’s income – This is a trick my parents used to do. If you’ve bought a property with your husband/wife/partner you can try living just off one person’s income, and put all of the second person income towards paying down your loan!
For a detailed guide on building your equity faster, check out our guide.
How can I access my equity?
Your mortgage serves as a security for a home equity loan. In some instances, you have the choice to use as much as you want.
This loan type has become very popular in the past few years as it offers flexibility to borrowers. Homeowners now have access to relatively cheap and competitive loan packages too.
Using the equity you have in your current home loan you will be able to:
- 🏡 Purchase another property: It’s unlikely that your current home is going to be your forever home. The good news is if you move, or you sell your current home you can use your current equity towards the new purchase.
- 🏗 Renovate your house: It is possible to borrow against the equity in your home and use it to fix up your house.
- 🚙 Buy a boat or a car: Home loan interest rates are much cheaper than personal and car loans, if it makes financial sense you could look at using your equity to buy a boat or a car.
- 💰 Heaps of other stuff: From paying for your wedding expenses to investing in the stock market if you have home equity you have options!
- ☑️ Build, and increase your equity: Even better than using your equity, you could try to build it by following the steps in the previous section.
Why is equity different on my home compared to an investment?
Ok, let’s go back to that example earlier 5 years after you bought the property.
- 🏠 Property Value: $700,000
- 🏦 Home Loan: $350,000
- 🤑 Equity: $350,000
- 🔢 LVR: 50%
Banks look at equity different depending on what your intended purpose is:
If its an investment, they will not let you release as much equity when compared to funds being used to purchase or improve a property to live in (also called owner occupied).
This only happens in a handful of situations, a lot of banks only go to 90% LVR in both circumstances but some will extend to 95% LVR for owner-occupied purposes.
Practically what this means is you might have access to $35,000 less in new equity lending:
- Equity Available as Owner Occupied 🏡
- $700,000 @ 95% = Maximum Loan $665,000.
- $665,000 minus existing loan $350,000
- New lending available from equity $315,000
- Equity Available as Investor 🏘
- $700,000 @ 90% = Maximum Loan $630,000
- $630,000 minus existing loan $350,000
- New lending available from equity $280,000
A common mistake people make when calculating equity here is they assume they can take the entire equity figure out – I.e. being $350,000.
Unfortunately, the banks will dial this back to fit within their maximum LVR criteria.
What banks have the best Equity loan?
This is where a lot of people get caught out.
Bank’s have specially designed ‘Equity Release’ and ‘Line of Credit’ products which they try to get people to use to withdraw equity.
(Only problem is the interest rates are usually 1-2% HIGHER)
The good news is that a number of banks have cash out policy in place which will give you a bit more flexibility around withdrawing equity.
Some banks will let you increase your loan up to $100,000 without any evidence needed what the funds are being used for:
… they just want to make sure you aren’t going to be taking the money out and spending it at the casino 🎲
Is an Equity Loan the Right Choice?
Unless you need an evergreen line of credit facility and want to pay 1-2% more than a standard investment home loan it doesn’t usually make sense to get a Line of Credit (equity loan).
It is only advised to take out an equity loan if you have the discipline to manage your expenses properly. There are so many people who spend the entire amount on lifestyle expenses but do not devise a plan on how to pay it back.
You can release the cash of up to 80% of your property value. Some banks allow you to use the cash up to 90% of the property price, but for that, you should pay a one-off lender’s mortgage insurance premium.
A line of Credit – The Best Bank?
Banks prefer a line of credit (LOC) over a home equity loan because the interest charged is higher compared to a standard loan.
Let me give you a few examples…
CBA Standard Variable Rate vs. Viridian Line of Credit
Head to head winner: CBA Standard Variable Rate
As you can see, there is a 1.16% difference between the CBA Discounted Standard Variable Rate of 4.87% compared to the Viridian Line of credit at 6.03%. The gap widens if you were thinking about opting for the 1 year fixed rate of 3.89% to 2.14%!
On a $300,000 loan, 2.14% would cost you $6,420 EXTRA per year…
Interest rates from CBA’s website, as at 20th February 2019.
Suncorp Home Package Plus Standard Variable Rate vs. Home Package Plus Access Equity (line of credit)
Head to head winner: Suncorp Access Equity (Line of Credit)
In our Suncorp Home Loan Review we looked at their Line of Credit Product, and given the extra features and benefits if you are an investor paying 0.10% extra could be a worthwhile investment.
Interest rates supplied from Suncorp’s website on February 20 2019.
My favourite home equity strategy
In this section, I’ll reveal some of my favourite “quick & dirty” home equity strategies.
Let’s dive right in…
Now we have already covered how to grow your equity, but what about ways to access your equity?
Withdrawing Home Equity, without an expensive Line of Credit…
As you can see above, some banks charge MASSIVE premiums to use their Equity Line of Credit Products.
So how do you avoid paying an extra 1-2 per cent?
The cash out method.
The cash out method allows you to withdraw equity, using lower home loan interest rates.
Meaning you could save THOUSANDS in interest costs.
Some lenders will restrict the cash out method to $10,000 – while others have UNLIMITED cash out options available.
The restrictive lenders might ask for a letter from your accountant, financial planner or even invoices to confirm what you’re spending the money on.
To find out if you qualify for the cash out method, chat to our brokers about your situation on 1300 088 065 or complete a free assessment.
Should I use my home equity?
Your equity building strategy or the decision to use your home equity will come down to your individual situation and circumstance.
If you are looking at growing your home equity, doing renovations or restructuring your loan our team at Hunter Galloway can help.
What we do is make it simple to get through the home loan process, and with our team of experts, we will help walk you through the process.
Our service does not cost you anything as we are paid by the lender when your home loan settles.
To chat about your home equity options book in a time to sit down with us, or feel free to call on 1300 088 065.
The information on this page is general in nature and should not be considered as advice. Before you act on this information you must seek independent legal and financial advice.