Unlocking your equity can improve your lifestyle and wealth

19 July 2021

Australian real estate is enjoying its best returns in decades, with national home values rising by 13.5%[i] for the financial year. With these improved values in mind, it might be time for you to reap some of the rewards by unlocking some of this stellar real estate growth to improve your wealth and lifestyle prospects.

The good news is that the extra value or ‘equity’ you have in your family home means you might now be able to achieve your goal of buying an investment property. Or perhaps it’s time to ditch the ageing Holden Commodore (VX) for a new set of wheels or join the thousands of grey nomads caravanning around this magnificent country we call Australia. Alternatively, you may want to renovate a kitchen or bathroom or adding a few rooms to your home. 

Once you have made an investment or lifestyle decision, you’re going to need to fund your next move somehow. Using the extra equity locked up in your family home is often a sensible method for financing your next venture.

What is equity?

The equity in your home is the market value of your property, less the balance owing on the mortgage. Let’s say your property is worth $800,000, and you have $500,000 left to pay on the mortgage. This leaves you with $300,000 in equity, however you will generally only be able to borrow up to 80% of the property value.

Loans with an LVR greater than 80% are then required to pay lenders’ mortgage insurance. The LVR is the ratio of the amount you are borrowing against the value of the property, expressed as a percentage.

In the above example, this means you’d have about $140,000 in equity you could borrow against. Then, your lender would be able to help you work out how much they would be willing to lend you. They determine this by assessing things like your current income and expenses.

Remember accessing home equity is debt, not savings, and you must repay the money to your lender. It is different to redraw which is payments you have made in advance on your loan that are available to access.

To understand your options, please chat with one of our Mortgage Specialists to discuss your borrowing capacity and equity guidelines.

How to access your equity? 

If you’re ahead with home loan repayments, the simplest way to access some equity is to use a redraw facility. A redraw enables you to access the extra capital you’ve paid off the mortgage, not the entire balance of your equity. 

To illustrate, let’s assume you bought a property worth $750,000 with a mortgage of $500,000 three years ago. You’re an excellent budgeter and have been able to pay $100,000 off the mortgage value in the meantime, so now you owe just $400,000. With the surge in property values, let’s assume the property is worth $1,000,000, which means you have $600,000 in equity ($1 million - $400,000). 

Using the redraw facility attached to the mortgage, you can access any additional repayments (over and above your minimum monthly repayments), no questions asked, which might cover the cost of a new car, caravan, a swimming pool, or a kitchen or bathroom refurbishment. Though, this amount may not be enough if you plan more significant projects such as a substantial renovation or the purchase of an investment property. 

Buying an investment property with home equity

Accessing the equity in your home is one strategy that’s commonly used for buying an investment property, especially as your tenants can help you pay off your investment loan.

Instead of a cash deposit, homeowners can use equity to buy a rental property, while investment property loans are often structured around using home equity. Moreover, lenders generally allow borrowers to borrow up to 80% of the property’s value, minus any outstanding debt.

To find out how you can access the equity in your home to buy an investment property, talk to us today by calling 1300 13 14 65.

Always seek advice

Unlocking all your equity to improve your lifestyle or wealth will not only increase your level of debt but involves taking on more risk too.

To make sure you are making the right move, it’s always a sensible move and best to speak with an expert such as your accountant or financial planner before dipping into your equity.

 

[i] https://www.corelogic.com.au/news/australian-dwelling-values-finish-financial-year-135-higher-loss-momentum-clear

 

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