So you might find yourself in a position where you’re looking to invest in more property. Or even thinking about renovating an existing one.
Of course, you’re going to need to fund it somehow. Using the built-up equity in your current home is a savvy way to help finance your next venture.
What is equity?
Your home’s equity is the market value of your property minus what you owe on your existing home loan. For instance, let’s say your home is worth $500,000 and you have $200,000 principal left to pay on it. That means you have $300,000 in equity. It also gives you a Loan to Value Ratio (LVR) of 40%. As long as you keep paying off your loan and as your property value increases, you’ll build equity. You can also further build equity by making larger repayments, lump sum repayments or renovating.
Capitalising on the equity in your home
You can take advantage of your equity in a number of ways:
1. Buying an investment property
You can refinance your current home loan to access your equity and use it to invest in a rental property. You’ll usually enjoy capital gains and the rent you receive can help pay off your mortgage or give you funds to invest further.
2. Renovating your home
Got an idea to improve your existing home? Accessing your equity could help turn those renovation goals into a reality sooner. When done properly, renovations can substantially increase the value of your property and help maximise the resale value of your property in the future. It is also important not to make improvements that exceed the value of your property, this is also known as overcapitalisation. You can learn more about it here.
3. Funding for other purposes
Perhaps you’re looking to consolidate a number of debts into one monthly mortgage repayment to help you get on top of your finances. Or you simply have to sort out some pressing financial needs. Whatever the case, you can use your equity to free up cash for a variety of approved purposes.
A few ways you can access your equity
You can access all or part of your equity. And you have a few options up your sleeve to do so. You can either refinance your existing mortgage or if you prefer, borrow on your equity.
This gives you the ability to use any additional repayments you’ve made on your home loan that are over and above the minimum payments.
This lets you borrow more on top of your original mortgage. You need to be aware that it can sometimes be at a different interest rate.
You can also refinance your existing mortgage to have access to the current market rates or other loan products that you may be eligible for, in addition to being able to borrow more on top of your original mortgage.
Think about the risks
Sure, it can be a big step forward when you’re about to buy an investment property or consolidating debts. But when you’re financing it using the equity in your home, you should be aware of the possible risks. Whether you choose to finance your venture by redrawing from your existing loan, applying for an Additional Advance or by refinancing your existing loan, you should consider the value of your home, your credit history and your ability to meet your repayments before you borrow against your home.
How much can you borrow?
You can use our calculators to help you work out how much you can borrow and what part your equity can play.
Like to know more?
If you’d like to find out if refinancing is the right option for you or learn more about equity, you can always speak to one of our Lending Specialists on 13 73 77 Monday to Friday 8:00am to 6:00pm AEST.
This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Pepper Group Limited ABN 55 094 317 665.