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Five ways to grow your equity

Five ways to grow your equity

When you’re shopping for home loans and looking around for properties, you’re not just aiming to create a pleasant abode for you and your family to live in. You have another goal in mind – to grow the equity in your home, which you can unlock for various purposes as you steadily pay off your mortgage.

Equity, for those not in the know, is simply the difference between how much your home is worth and what you still have owing on your mortgage. Unfortunately, short-term price growth is not always going to ensure this, as Australians recently found out with the release of Australian Bureau of Statistics (ABS) home price data on November 11. 

“[P]rice growth is easing to a much more sustainable rate,” said Shane Garrett, Housing Industry Association Senior Economist. 

Failing this, what are some good ways to grow the equity in your home?

Increase your mortgage repayments

You don’t simply have to wait for your property to increase in value for your equity to grow. You can instead look to minimise your home loan debt by increasing the frequency and amount of your mortgage repayments

You’re probably making monthly repayments right now. Why not switch over to fortnightly ones? Or why not make arrangements with your lender to pay a bit extra instead? Just be sure to budget accordingly, and remember some lenders charge fees for this. 

Put down a higher deposit

Generally, in Australia it’s recommended that you save 20 percent of a property’s value as a deposit. While you can put down a smaller amount, borrowing over 80 percent of a property’s value requires you to take out lenders mortgage insurance, taking money away from what you could be putting toward repayments. 

Consider instead putting a bigger down payment on the property, increasing your equity and reducing how much interest will build up. 

Choose the right home loan in the first place

Like the property itself, there’s no ‘one-size-fits-all’ home loan. Home loans from different lenders can have all kinds of interest rates, terms and conditions that can increase or decrease the amount you end up owing on your mortgage. Do a home loan comparison to help take out some of the guesswork and narrow your search to something that’s a good fit for your circumstances. 

Make renovations

Making alterations to your property, from minor repairs to huge, eye-catching additions, can be a great way to bump up the value of a home. Renovating your bathroom, for example, could see its final sale price climb substantially, increasing your equity. It doesn’t all have to be dramatic though – even replacing your kitchen whiteware with new models can have an impact. But before you pull on the tool belt, get some advice from a local real estate about how to best spend renovation dollars and avoid overcapitalising on the property.

Hold on to your property

Short-term price growth isn’t necessarily going to net you increased equity. But it’s still good to keep in mind that property, by its very nature, tends to increase in value the longer you hold on to it. Data compiled by analyst Philip Soos shows that, since 1950, house prices in Australia have been steadily rising, with peaks and troughs along the way.

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Learn more about home loans

Is a home equity loan secured or unsecured?

Home equity is the difference between its current market price and the outstanding balance on the mortgage loan. The amount you can borrow against the equity in your property is known as a home equity loan.

A home equity loan is secured against your property. It means the lender can recoup your property if you default on the repayments. A secured home equity loan is available at a competitive rate of interest and may be repaid over the long-term. Although a home equity loan is secured, lenders will assess your income, expenses, and other liabilities before approving your application. You’ll also want  a good credit score to qualify for a home equity loan. 

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.