What is equity and how can it be used?
Equity is the difference between the value of your property and the amount you owe on your mortgage.
It’s an asset that can be used to build wealth, and it grows over time as you pay off your mortgage or as the value of your property increases.
For example, if your property is valued at $500,000 and you owe $300,000 on your mortgage, your equity is $200,000.
How can I build home equity?
The most obvious way to build home equity is by paying off your mortgage. This means making your monthly payments on time and even making additional payments if you can afford to.
The more you pay off your mortgage, the more your equity will grow.
Another way to build home equity is by making improvements to your property that increase its value.
Tip 1: Use equity in your home to purchase an investment property
Factors to Consider About Investment Property Affordability
By using the equity in your home as a deposit for your investment property, you may be able to secure a lower interest rate and avoid paying lenders mortgage insurance.
Tip 2: Invest in home improvements using an equity home loan
Another way to use the equity in your home is to invest in home improvements such as kitchen or bathroom renovations, installing a pool or a granny flat.
This can increase the value of your property and allow you to access more equity in the future if you need it. You can use an equity home loan to fund these improvements and pay it off over time.
If you are considering an equity home loan, keep in mind that depending on your request we may be only able to lend up to 90% or 95% of the value of your property.
Tip 3: Use a home equity line of credit (HELOC) for financial investment
A home equity line of credit (HELOC) is a flexible loan that allows you to access your equity as you need it. If you are considering a HELOC, we may be only able to lend up to 80% of the value of your property.
For example, you could use a HELOC to purchase stocks, invest in a new business or fund a personal project.
The interest rate on a HELOC is usually lower than a credit card or personal loan, making it an attractive option for those looking to build wealth.
Tip 4: Use equity in the home to consolidate debt
If you have multiple debts, you can use the equity in your home to consolidate them into a single loan. By doing so, you can simplify your debt management, reduce your interest rate, and lower your monthly repayments.
To consolidate debt using your home equity, you can either take out a home equity loan or access your equity through a refinance.
With a home equity loan, you may be able to borrow money against the equity in your home and use it to pay off your debts, which is managed as part of loan settlement. There are risks associated with debt consolidation, so you should ensure you speak to your lender and understand these before you proceed.
It's important to keep in mind that using your home equity to consolidate debt can be risky if you are not disciplined in managing your finances. If you fail to repay your loan, you risk losing your home. Therefore, it's important to use this option only if you are confident in your ability to repay the loan on time.
Tip 5: Access the equity in your home through a refinance to release some of your equity in the form of cash
Accessing Your Home's Equity - Its Benefits, Uses, and Costs
Refinancing to access equity can be a good option if you need a large amount of cash and have a significant amount of equity in your home. However, it's important to keep in mind that this method increases your mortgage balance and can extend your repayment term, which means you may end up paying more interest over time.
Tip 6: Use a reverse mortgage as part of your savings plan
A reverse mortgage is a loan that allows homeowners who are 60 years or older to borrow against the equity in their home. Unlike a traditional home equity loan, the borrower does not have to make any repayments until they sell the property or pass away. The loan amount is based on the value of the property, the borrower's age, and the interest rate.
A reverse mortgage can be a good option for retirees who need extra income to supplement their retirement savings. It can also be used to fund home improvements or pay off debt. However, it's important to keep in mind that a reverse mortgage reduces the equity in your home, which means there may be less to leave to your heirs when you pass away.
Steps to releasing equity in your home
To access the equity in your home, you need to follow these steps:
- Determine how much equity you have in your home. You can use an equity calculator or contact a lender to get an estimate.
- Decide how much equity you want to access and what your intended use of the funds will be.
- Choose the best option for your needs, such as a home equity loan, HELOC, refinance, or reverse mortgage.
- Apply for the loan or mortgage with a lender. The lender will assess your creditworthiness and the value of your property before approving the loan.
- Once approved, receive the funds and use them for your intended purpose.
It's important to keep in mind that releasing equity in your home should be done with caution and careful consideration.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.