Are you curious about your usable home equity?
Do you want to know the exact process for calculating your net worth?
Look no further!
In this blog post, we’ve got you covered. With our step-by-step guide.
Follow these steps and you’ll learn exactly how to work out your usable equity and gain a better understanding of your financial situation.
Let’s get started!
Table of Contents
Calculate Your Home Equity
Home Equity Basics
Equity is simply your personal interest in a property. It increases over time as you pay down your home loan or when your property value increases.
In other words, equity is the value of your property—calculated as the value of the property minus your home loan.
Here is 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): $750,000 – $350,000 = $350,000
Your equity has grown to $350,000, and the LVR of your loan has been reduced to 50%!
Why does equity matter?
You should consider equity as an asset that forms part of your net worth.
It is possible to withdraw part or all of the equity in the future (sometimes called ‘cash out’) from your property for various reasons, such as 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 AWESOME.
(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 short version of it is:
- Get another bank valuation. It’s worth getting a second (or sometimes third) opinion on your property’s value. We have seen up to $130,000 differences between different bank valuations.
- Put down a bigger deposit. While it isn’t always possible, putting down a large deposit automatically gives you more equity and potentially lowers your loan repayments!
- Get a shorter loan term. This little gem can help give you some forced savings. By reducing your loan term, loan repayments will be higher, and you will build equity much faster.
- Fix up your property. It’s incredible how much of a difference a coat of paint can make to the value of your property! You can aim for basic renovations like painting or bigger ones like adding extra rooms.
- Pay more on your repayments. Making extra repayments without shortening your loan term has the same effect of paying your loan down quicker, reducing the mortgage balance and increasing your equity!
- Use bonuses and tax refunds. When you cannot change the loan term or need more 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. If you’ve bought a property with your husband/wife/partner, you can try living off just one person’s income and put all of the second person’s income towards paying down your loan!
For a detailed guide on building your equity faster, check out our comprehensive 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 will 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 use your equity to buy a boat or a car.
- Do heaps of other stuff. You have options if you have home equity, from paying for your wedding expenses to investing in the stock market!
Increase your equity further. Even better than using your equity, you could build it more by following the steps in the previous section.
Why is equity different on my home compared to an investment property?
Ok, let’s go back to that earlier example. Five years after you bought the property.
- Property Value: $700,000
- Home Loan: $350,000
- Equity: $350,000
- LVR: 50%
Banks look at equity differently depending on what your intended purpose is. If it’s an investment, they will not let you release as much equity as they would if you were using the funds to purchase or improve a property to live in (also called owner-occupied).
Many 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 of $350,000
- New lending available from equity is $315,000
- Equity Available as Investor
- $700,000 @ 90% = Maximum Loan $630,000
- $630,000 minus existing loan of $350,000
- New lending available from equity is $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. But 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.
Banks have specially designed ‘Equity Release’ and ‘Line of Credit’ products to get people to withdraw equity.
The only problem is the interest rates are usually 1-2% HIGHER.
The good news is that several banks have a cash-out policy in place, which will give you a bit more flexibility around withdrawing equity.
Some banks will let you increase your loan by $100,000 without needing evidence of what the funds are used for.
However, they will just want to ensure you aren’t taking the money out and spending it at the casino.
Is an Equity Loan the right choice?
An equity loan allows you to borrow against the equity in your house.
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).
Taking out an equity loan is only advised if you have the discipline to manage your expenses properly. So many people spend the entire amount on lifestyle expenses but do not devise a plan to pay it back.
You can release 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.
Our favourite home equity strategy
In this section, we’ll reveal some of our favourite “quick & dirty” home equity strategies.
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…
Some banks charge MASSIVE premiums to use their Equity Line of Credit Products. So how do you avoid paying an extra 1-2%?
The cash-out method.
The cash-out method allows you to withdraw equity using lower home loan interest rates. 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 determine 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 choosing to use your home equity will come down to your individual situation and circumstance.
If you are looking to grow your home equity, renovate, or restructure your loan, our team at Hunter Galloway can help. 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 a time to sit down with us, or feel free to call on 1300 088 065.
Unlike other mortgage brokers who are just one-person operations, we have an entire team of experts dedicated to helping make your home loan journey as simple as possible.
The information on this page is general and should not be considered advice. Before you act on this information, you must seek independent legal and financial advice.