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

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.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

What is a redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

Mortgage Calculator, Interest Rate

The percentage of the loan amount you will be charged by your lender to borrow. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

How much information is required to get a rating?

You don’t need to input any information to see the default ratings. But the more you tell us, the more relevant the ratings will become to you. We take your personal privacy seriously. If you are concerned about inputting your information, please read our privacy policy.