If you’re considering an investment property, consolidating debt or borrowing to renovate your home, you’ve probably been asked, “How much equity do you have?”.
But if you’re like most of us, you might not be quite sure how to calculate it.
Calculating your equity
Equity is the amount of your home that you’d actually own if you sold your house and repaid your loan today. For example, if your home is valued at $500,000 and you owe $200,000 on your home loan, then your equity is 60 per cent. It’s the $300,000 that would be yours. The amount of equity you have will grow if the market value of your home increases. With each repayment you’re also increasing equity by chipping away at the principal of your loan (unless your loan is interest-only).
To calculate your equity you need to know the market value of your home and the amount that you’ll need to pay if you end your loan. The second one is easy, just ask your home loan provider for your ‘pay-out’ figure, which tells you exactly how much you owe if you end your loan today.
To work out the market value of your home you may have an independent valuation completed as part of your loan application. However, it’s good to know a ballpark figure of your equity before you apply for an investment loan. Take a look at what similar houses around your neighbourhood are selling for. Perhaps ask a local real estate agent to estimate what they think your home is worth. While none of these are as concrete as an independent valuation, they will give you an idea of the market value of your home.
Depending on your personal circumstances, later down the track you may consider whether to use your equity to invest in more properties. Find out more about using equity to grow your property portfolio. Investing in property using your equity can have tax consequences, so we recommend you speak to your accountant or tax adviser to get more information and determine whether this is an appropriate strategy for you.
Repaying your loan
Before you start dreaming about how you’ll spend your equity, it’s worth remembering that market prices can fluctuate so it is important that you consider the amount of your loan repayments. The Pepper Home Loans Repayment Calculator can help you determine your monthly or fortnightly mortgage repayments.
If you’re planning on renovating, it’s also worth considering what value (and equity) the renovation will add to your home. You want to make sure you don't overcapitalise, where you spend more on the renovations than your property ends up being worth.
Once you’ve got an idea of how much equity you have and how you want to invest it, why not contact one of our Lending Specialists on 13 73 77, who can walk you through some options and talk about your circumstances? We have a range of home loan products that may be suitable to your individual needs.