What is equity in a home?

If you’re searching for a way to finance your next big venture, your home’s equity could be the answer. In this article, you’ll learn what equity is and how unlocking it could provide you with new financial opportunities.

Let’s get to the following commonly asked questions: 

• What is home equity?
• What is the significance of equity for homeowners?
• What do I need to consider before borrowing a home equity loan?
• How much home equity will my lender let me borrow?
• How do I choose the right home loan for me?
• How do I apply for a home loan?
• How do I access equity for my home?
• How do I increase my home's equity?

Q1. What is home equity?

Equity is the difference between your home's current property market value and the amount of money you owe to your lender.

For example, if your home's current value is $500,000, and you still need to pay back $350,000 of your home loan, that means you have $150,000 in equity.

By utilising the equity in your home, you can potentially secure a personal loan or line of credit using your home as collateral. This additional funding can then be used to finance the purchase of other assets, such as an investment property.

Equity is incredibly valuable for homeowners. Let's explore why it's so significant and how you can use it to your advantage.

Q2. What is the significance of equity for homeowners?

Depending on your financial stability, your bank may allow you to use your existing home as a security deposit to borrow back the equity you own. We refer to this as a home equity loan or 'line of credit'.

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In short, you get money in your bank account to spend on whatever you like, and your bank agrees that you will pay the money back in instalments over time. 

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An equity loan is a great way to enter the real estate market through property investing. Some people also use equity to invest in stocks or start a business. You could even use equity to buy a car, pay for home renovations, or take a holiday. The choice is yours.

Note: It’s important to remember that an equity home loan is a two-way street. Your lender will expect you to pay back the money over time. Depending on the home loan term you agree with your bank, this could mean your monthly payments increase. And, if you default on your payments, your lender has the right to reclaim your home. 

As you can see, borrowing against home equity shouldn’t be taken lightly. Let’s explore some of the key things you need to consider before you decide to cash out.

Q3. What do I need to consider before borrowing a home equity loan?

• Purpose: Before you withdraw your home equity loan, it’s important to consider how you intend to use your money. Are you interested in buying an investment property? Perhaps you’re looking to renovate to increase your home’s value. Whatever your objective, ensure you have a plan of action before you take out your loan.
• Loan term: Always consider the length of your loan term before making your final decision. If your current home loan term stays the same, you’ll need to make extra repayments each month to account for your equity loan. See if your bank will let you increase your loan term. Spreading the cost over a longer period means you pay less each month.
• Interest rates: If you’re on a variable-rate loan, be aware that your interest rates could fluctuate with time. Ensure you have enough money in the bank to account for rising rates. Alternatively, consider switching to a fixed-rate loan to ensure you aren’t left out of pocket down the line.
• Savings: Before you borrow against the equity in your home, consider whether you have enough money in your savings account to cover you in case of emergencies.

Important: Before making any significant financial decisions, we always recommend speaking to financial advisers for assistance. A home loan specialist can provide personalised financial advice, so you can be confident you’re making the right call.

Q4. How much home equity will my lender let me borrow?

Before allowing you to borrow money, the bank will check your circumstances to assess your borrowing power. They will evaluate your employment stability, outstanding debts, living expenses, and home loan term to determine whether you can repay the money. Your lender will then tell you the amount of equity they will allow you to withdraw.

Provided everything is in order, your bank will usually let you borrow 80% of the value of your home minus the money you owe. For example, if your home value was $500,000 ($400,000 at 80%) and your home loan was $350,000, your bank would let you withdraw $50,000 directly. We refer to this figure as your usable equity. 

Note: You can borrow more than 80% of your property’s value, but your bank usually requires you to take out Lenders’ Mortgage Insurance (LMI).

Q5. How do I access equity for my home?

A home equity loan isn’t the only way to access your property’s equity. Here are two other common ways you can secure the funds.

• Refinance your home: This involves replacing your existing mortgage with a new one, usually with a higher loan amount. Refinancing your home loan allows you to compare comparison rates and evaluate your options. 

As you likely have more equity than when you first purchased your property, refinancing allows you to discover new deals, find a lower interest rate and secure a better offer. WeMoney makes finding the best comparison rates easier.

• Reverse mortgage: If you’re age 60 or over, you may be able to borrow equity against your home without making a regular loan repayment. Your loan will be repaid either when your property is sold or when you pass away.

Q6. How do I increase my home's equity?

There are two primary ways to increase your home’s equity:

1. Increase the value of your home: If you’ve owned your home for an extended period of time, chances are your property is worth more now than when you bought it. In addition, renovating your home may increase its value. The more your home is worth, the more equity you have at your disposal.
2. Reduce the amount of money you owe the bank: As we know, your equity is the result of your property value minus the money you owe your lender. Therefore, the more money you pay back, the more equity you have available. Making additional repayments whenever possible is an easy way to pay off your home loan faster and increase equity quickly.

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Disclaimer: The author is not a financial advisor, and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.