Since August 2020, house prices in Caloundra (4551) on average have increased by around 37.0% (realestate.com.au). If you own a property in Caloundra, chances are you will have some equity built up. The equity you have in your home can open the door to additional funds you can use to invest in more property, renovate your existing one, and more.
Curious as to how you can unlock your home equity to reach your financial goals? Read on.
What is home equity?
Your home equity is the difference between your property’s market value and the balance of your mortgage. As you pay off your home loan, the equity you have in your home grows, and if the property’s value increases, your equity will go up as well.
Working out the amount of equity available in your property is as simple as getting a sense of how much it is worth in the current market and then subtracting the balance of your current loans secured by the property.
For example, if you purchased a house for $900,000, with a deposit of $200,000 and a loan of $700,000 – you have equity of $200,000 in the property.
If the property’s value increases to $1,100,000 and you’ve repaid $200,000 off the mortgage, you now have a 1.1 million dollar property, minus the $500,000 home loan balance still to pay. This means your equity in the house has risen to $600,000.
The best way to understand the value of your home is to get an appraisal done from a local agent who can provide an educated estimate based on comparable sales in the area for properties like yours.
Once you have a reasonable idea of your home’s potential market value and the equity you have in it, it’s time to work out how much usable equity you can access.
How useable equity allows you to borrow.
Understanding your usable equity will give you a clearer picture of the funds you might be able to access. A bank will typically lend you up to 80% of a property’s market value, less the amount you owe and subject to serviceability.
This is when your mortgage broker can help. They will be able to give you an idea of the usable equity in your home loan based on current market data and your specific situation.
This is also a good opportunity for your broker to do a “health check” on your current home loan, comparing it based on factors such as interest rates, fees and features against other options from your current lender or other lenders in the market.
It’s important to note that the product you choose and the amount of equity you are looking to access may result in various fees and costs.
Make renovations, buy another property or something else?
The usable equity in your home gives you options. You could access it to fund a renovation which could increase its market value. You could also use it to top up your current home loan if you wanted to consolidate debt into one loan, or even buy a new car. The choice is yours!
The most common way people use their equity is to invest in more property. When you use equity to buy a second home, you use the available equity in your home as security instead of a usual cash deposit. Building an investment property portfolio can help you accumulate wealth as your property grows in value and provide you with a rental income stream.
However, just because you’ve got equity in your property, it doesn’t mean you need to keep it in a property. Diversifying into a different asset class is something that could be worth exploring.
With this in mind, using your home equity to aid your wealth creation strategy can be a rewarding move.
To summarise, these are steps to follow if you’re considering accessing your equity:
1. Calculate available equity with a real estate agent.
2. Work out accessible equity with your mortgage broker or bank.
3. Review your loan options with your mortgage broker or bank.
4. Work out the costs for accessing equity.
5. Loan application and settlement.
6. Unlock equity and use it for whatever purpose you choose.
If you’re interested in what your property might be worth in the current market, reach out to the team here at Henzells on 5491 2000 or firstname.lastname@example.org.
As always, it’s important to speak with your financial adviser before making any decisions, as they can consider your risk profile, goals, and objectives.