What is home equity and how can you use it?
It’s often pointed out that the family home is our largest asset. In fact, until you own your home outright, it’s actually your equity in the property that is your asset.
So, what is home equity? It’s the current market value of your home minus the balance of your mortgage. If your home is currently valued at $700,000 and your mortgage balance is $600,000 then your equity is $100,000. In three years’ time, your home might be valued at $730,000 and your mortgage reduced to $580,000. Your equity would then be $150,000.
The value of building home equity
You can build the equity in your property by paying down your mortgage and also by making improvements to your home that add to its value. Your equity may also increase if the value of your home rises due to increases in values in the overall market.
To build the equity in your home as fast as possible, you might consider making extra payments to your mortgage, keeping your home well maintained, and steadily making improvements to it as you can afford them.
Building substantial equity in your home gives you an increasing asset and greater financial security. If needed, you may also be able to access the equity for other purposes.
Accessing your home equity
Many homeowners access their equity in order to invest in another property or carry out substantial renovations to their home. Others do so in order to pay for private school fees, take a once-in-a-lifetime holiday or give a helping hand to an adult child with the deposit for their own first home. Older people can access the equity in their home via ‘reverse mortgage’ loan products that allow them to stay in their own home for longer.
If you are considering accessing your home equity, you first need to do some rough calculations to determine how much you have. Study sales of comparable houses in your local area, use online valuation tools or call a local real estate agent for an appraisal of the current market value of your home. From this research, you can work out the approximate value of your home. Err on the conservative side as your lender will require a bank valuation of your home prior to refinancing and the valuation may be at the lower end of the market value of their home.
How much equity can be released?
Depending on your financial situation and your lender’s requirements, you may be able to access up to 80 per cent of your equity. Some lenders will allow up to 95 per cent but will require Lenders Mortgage Insurance (which costs extra and protects the lender in the event you default on your loan, not you!).
The equity in your home is a precious asset, so approach accessing it with considerable care. A mortgage broker can help you understand the pros and cons of accessing your equity and how to calculate how much you may be able to access. If they are authorised with ALI Group, they can also offer you home loan protection insurance as a safety net should you suffer a serious illness or injury or lose your job1 and be unable to meet your mortgage payments. For more information, please get in touch with the friendly ALI team today.
1 Full details of the benefits covered by Loan Protection Plan are in our Product Disclosure Statement.
Loan Protection Plan is jointly issued by Hannover Life Re of Australasia Ltd ABN 37 062 395 484 (Death, Terminal Illness, Living and Accidental Injury Benefits) and QBE Insurance (Australia) Limited ABN 78 003 191 035 AFSL 239545 (Involuntary Unemployment Benefit). It is distributed by Australian Life Insurance Distribution Pty Ltd ABN 31 103 157 811 AFSG 226403 (ALI). ALI receives commission for each policy sold. Any advice provided is of a general nature only and does not take into consideration your personal objectives, financial situation or needs. You should consider the Product Disclosure Statement when deciding if this product is appropriate for you.