If you’ve already had a property loan for some time and you’ve paid off a significant chunk of the property value, you may be thinking about home equity. This can help you access some of the funds you have used to pay for your home, using instruments like home equity loans to provide extra capital for a new investment or another project. But what is equity exactly, and how much equity can you release from your property?
Understanding Equity
When you take out a home loan or property mortgage to purchase an asset, you can’t leverage the full value of your property straight away. As you have had to borrow funds to complete the property purchase, you will have to pay off the principal of the loan amount, as well as handle interest payments for the duration of the loan term.
As you pay off your mortgage, this reduces the outstanding loan balance and your equity increases. This means you will need to be making headway on reducing the principal balance of your home loan, doing more than simply paying interest. An interest-only repayment period will not help you build equity in your property.
Building Equity in Your Home
Lenders will generally agree to let property buyers borrow up to 80% of the total value of the property. This means you will put down a 20% deposit and will, therefore, “own” 20% of the property upfront — i.e. you have 20% of the property’s value in usable equity immediately.
On the face of it, this seems like a very simple equation with an equally simple progression. Once you have paid off a further 2% of the total value, you will have 22% equity and a loan balance of 78%. When you have paid off a further 3%, your usable equity will rise to 25%, and so on.
But, in practice, the situation is a little more complex. Your usable equity is defined by the current market value of your property, so an increase in value means an increase in equity, as long as you are up to date on your mortgage payments.
- Increased Property Value Means Increased Equity – This is of particular importance to those purchasing investment properties or similar kinds of real estate. If you invest shrewdly, purchasing a property in an area where property values are increasing rapidly, this can translate into significant increases in the available equity. By shopping around, researching the market, and making a smart purchase, you can quickly build equity in your property.
- Growing Value with Home Improvements – There are other ways that you can use to build equity more quickly. If your mortgage provider permits you to make early payments or allows you to pay an amount greater than the minimum monthly repayment, you may be able to rapidly increase the equity you are able to release from your property. However, increasing your mortgage repayments should be considered carefully, and you should take your financial situation and the terms and conditions of your mortgage into account before you do this.
Making home improvements can also help you release further equity from your home. As long as these home improvements are actively increasing the value of your property, this will have a positive impact on the amount of equity available to you.
Releasing Equity from Your Home
To release equity from your property, you will need to take out a home equity loan. This essentially means borrowing against the value of your property, then subtracting the remaining balance on your original home loan or mortgage.
You will not generally be able to release all of the equity in your property. When you take out a new loan, the lender will apply a loan to value ratio (LVR) to the transaction, and you may only be able to borrow up to 80% of the total value of the property. There may be other fees to factor in also, such as ongoing interest rate payments and lenders’ mortgage insurance.
Calculate these fees carefully and weigh up how much you will have to spend to release this equity. If you have paid off a significant amount of your original home loan, releasing property equity could be more cost-effective than other forms of borrowing, such as lines of credit or credit cards.
Find a Home Equity Loan or Learn More
The Sydney Brokers team is here to help you find the right home equity loan for your needs and understand your options. Reach out to our team today to get started.
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