Your home is one of the few financial assets that has the potential to appreciate in value when you start paying off what you borrowed for it. The equity in your property is the difference between the current market value and the amount you owe on your mortgage.
Building equity in your home is important, as it allows you to:
- Borrow against it when you need it
- Build wealth over time when the value of the property increases
- Earn a profit when you sell your home
When Do I Have Equity In My Home?
You have equity in your home when the home’s value is greater than the amount you owe on the loan.
Banks usually calculate the usable equity in your home as 80% of the property value, minus the amount you owe on your mortgage.
For example, say the current value of your home is $850,000 and the balance on your mortgage is $300,000. Most banks would allow you to use $380,000 of equity.
$850,000 – ($850,000 x .20) – $300,000 = $380,000
Some lenders might let you borrow more than 80% of the current value, but you would have to pay Lenders Mortgage Insurance (LMI).
How To Build Equity In Your Home
There are two ways you can build equity in your house.
1. Increase the property value
2. Decrease the amount you owe on the mortgage
Here are some ways you can increase the value of your home:
1. Buy Property In Emerging Suburbs
If you’re priced out of buying in capital cities or expensive suburbs, look towards emerging suburbs. Properties in these suburbs have the potential to grow in value and you can buy them at affordable prices now.
Emerging suburbs are characterised by infrastructure development, employment growth and people moving towards those suburbs. Learn more about how you can spot an emerging suburb.
If you buy property in an emerging suburb, the value of your home will probably increase over the next five years, helping you build equity.
2. Renovate Existing Property
You can increase the equity of your home through renovations and improvements that increase the property value. Upgrading the kitchen, landscaping or number of rooms can increase your equity.
With renovations, you want to ensure you plan well and do not overcapitalise, so you can recoup the amount you invest.
Routine maintenance and inspection of your home can also help maintain the value of the property. Fix any issues as they arise, as the value of your home can decrease if it’s in a dilapidated condition.
3. Wait For Values To Rise
Investing in property is a long-term strategy, as prices usually appreciate in value a few years down the line. For owner-occupiers, the value of a home might increase if it’s in the right location and they live in it for a few years.
As property is one of the few assets that increases in value as you pay down debts attached to it you can build up the equity in your home just by staying in it for more than five years.
4. Get Another Bank Valuation
If you need to access equity, you can revalue your property if you think the value has gone up. Different banks have their own valuation methods. If the existing lender gives a valuation lower than expected, you can ask for a valuation from a different bank.
At Home Loan Experts, we can arrange a free bank valuation for you if you need to refinance or access equity.
5. Save A Larger Deposit
By saving a larger home deposit, you’re building equity in your home from the start. In most cases, a larger deposit means you don’t need to borrow as much from the bank. So if the size of your home loan is small and you’re borrowing less than 80% of the property value, you’re on your way to building substantial equity.
Also, if your deposit is 20% or more of the property value, you do not have to pay LMI, potentially saving you thousands of dollars.
The second way to build equity is to reduce how much you owe on your mortgage. There are various ways you can do this:
6. Use An Offset Account
An offset account helps you reduce the amount of interest you pay. The more money you have in your offset, the less interest you pay.
Since the home loan interest is calculated based on the balance of your loan, the money in your offset account helps reduce the loan balance.
Learn more about how an offset account helps reduce the interest you pay on your home loan.
7. Make Timely Repayments
Making repayments on your home loan also helps build equity. By making regular and timely repayments as they’re due, you’re slowly chipping away the balance of your mortgage, accumulating equity that you can use whenever required.
Making timely repayments also establishes positive credit behaviour.
8. Make Extra Repayments
If possible, you can even make extra or lump-sum repayments. If you have received a tax refund, a bonus or a commission, you can use this money to increase your repayment amount. By repaying more than the required amount, you’re paying off your home loan sooner.
Some lenders might charge a penalty for lump-sum or extra repayments. It’s best to check with your lender or mortgage broker before moving ahead.
You can use our extra repayment calculator to work out how soon you can pay off your mortgage.
9. Switch To Fortnightly Repayments
By increasing the frequency of your repayments from monthly to fortnightly, you’re adding the equivalent of an extra monthly repayment each year.
For example, Tina has a loan balance of $800,000. Her interest rate is 3% and she’s making a monthly repayment of $2,500.
| Repayment frequency | Monthly | Fortnightly |
|---|---|---|
| Required repayment amount | $2500 x 12 | $1250 x 26 (Since it’s fortnightly, the repayment is half of the monthly amount) |
| Total amount repaid each year | $30,000 | $32,500 |
| Extra paid each year | $0 | $2,500 |
Tina pays $2,500 extra each year by switching to fortnightly repayments. She also paid off more of her home loan with fortnightly repayments. This helps reduce the balance on her home loan more quickly and builds equity.
There are other ways you can pay off your home loan sooner, but the ones outlined help to build equity.
What Can I Do With Unlocked Home Equity?
The equity you’ve built can be used for several purposes, including:
- Paying off your credit-card debt
- Paying off car loans and personal loans
- Renovating your home
- Consolidating debts
- As a deposit on an investment property
Home Loan Experts’ mortgage brokers are here to help. Call us on 1300 889 743 or complete our free assessment form to access your equity.