06 Dec Unlocking the equity in your home
One of the most powerful elements of real estate is that you’re able to access the equity that has been built up over time to continue to grow your property portfolio.
By using equity, you don’t have to go through the process of saving for multiple deposits meaning your portfolio can continue to expand over time.
Your equity is the difference between what your property is worth and the amount of money you have left on your mortgage. As the value of your home increases over time and you pay down your mortgage, that equity value typically increases.
For example, if you buy a house for $450,000, with a $100,000 deposit and a loan of $350,000 – you have $100,000 of equity in the house.
If the property’s value increases to $600,000 and your mortgage remains the same, the equity in your home goes up from $100,000 to $250,000.
However, it’s important to note that you can’t access all of the equity in your home. Your useable equity is the amount of equity in your home you can access. Just like when you take out a home loan initially, your lender will want to see a deposit, which will normally be around 20 per cent. The same thing will apply when you look to access the equity that you’ve built up over time. You’ll be able to access up to 80 per cent of the property’s value without paying other costs such as Lenders Mortgage Insurance (LMI).
How to access your equity
The way most homebuyers access equity is through refinancing their current home loan. When you speak to your mortgage broker in Melbourne, they will compare your home loan options and take out one or more new loans and pay out your existing home loan. You will then have the equity available to use as a deposit for another property.
Costs and considerations
The other key consideration when looking to refinance to access your equity is that you have the borrowing capacity to allow you to comfortably make the repayments on the loan. When you access the equity you are effectively taking on a larger loan. While these costs will often be offset by any rental income on your new property, you are still taking on another mortgage. So it’s important to speak with your mortgage broker and make sure you’re going to be comfortable servicing any additional debt.
There could also be some costs involved in accessing equity, particularly if you have to pay out any fees to exit your previous home loans. Along with LMI, there could also be costs involved such as application fees and things like valuations that will need to be factored in.
Using the equity in your home is the way thousands of Australians have grown their property portfolio’s over the years. It’s an incredibly powerful way to build wealth and is why residential real estate is such a powerful asset class.
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