Time to read : 2 Minutes
As a mortgage broker I get asked questions about home loans all day long – even on the weekends by my friends and family.
📈 Lately, with the rate rises really starting to make an dent in most budgets, I've been asked a fair bit about equity and what it can do.
🥜 In a nutshell, equity is how much you 'own' in real cash terms in your house, e.g. if you have an $800K home and owe $200K, your equity would be $600K.
Get key information on reverse mortgages in our fact sheet here
What can you do with that equity? A lot more than you might think.
1. Buy another property – you can use your equity as a deposit on an investment or a second home. If you pass the serviceability test you could borrow up to 80% of your equity.
2. Other investments – yes, that's right. You don't necessarily have to use your equity to buy another place. You could use it on shares to help build your wealth in other ways.
3. Renovation – this one is a bit more well known: You can use your equity to fix up your kitchen, extend, or add a new bedroom for your expanding family. It can be a great way to increase the value of your existing home but be careful not to over-capitalise – meaning you spend more on renovating your place than it would get if you sold it.
4. Cash-out refinancing – if you have other debts you need to service (like paying off a credit card, buying a new car or medical costs), is to take out a bigger mortgage which replaces your current home loan and bundles your other debts in together. You 'd have to show you can afford the larger repayments, but this option can make managing your finances a lot easier.
5. Travel – you can use the equity within your property to apply for additional funds and that means go travelling. You can finally tick off the places on your bucket list such as the pyramids of Egypt, the Niagara Falls or the Great Wall of China, to name a few.
Tip: when using the equity you may also find there are better products on the market and it may work out cheaper to refinance your loan with another lender.
6. Redraw – that's right, you can draw down on your extra repayments, e.g. you've been paying $3000 a fortnight in repayments for the last three years, when you only had to pay $2500. Let's do those sums – $500 x 26 fortnights x 3 years = $39K that you could potentially have access to use as you wish.
7. Reverse mortgage – this is as it sounds, you borrow what you have already paid. This is usually only available once you reach a certain age and it is capped.
Be aware: a lot of properties in Australia lost value when the market slipped, so you may not have a lot of equity if you've only bought your home recently.
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Debt is debt, even if you're using your equity.
🛒 As always, consider all your options, speak to a financial professional like a broker, and shop around to get the best deal
👍 As a rule of thumb – borrow what you can afford to repay.
👀 Do your sums, check the fees and watch out for Lenders Mortgage Insurance (LMI), which you could get stung with if you slip beneath 20% equity.
☎️ My team and I are here to help you navigate this process. We love answering questions and nothing makes us happier finding the exact right product for you even if it is not with us.
Financial Disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions.
