what is home equity and how to use it

What is home equity and how to use it?

Have you ever heard about the concept of home equity? Do you have any idea of what equity is, how it is calculated and what to do with that? If you said no to all these questions, don’t worry: we are here to help you with that!

If you want to understand a bit more about home equity and how to use it in your favour, we have put together in this blog post some of the main questions we have received from our clients at Capta Financial that may not be clear to you yet. 

Let’s dig deeper into it:

What is home equity?

Home equity is the difference between the current value of your property on the market and the outstanding mortgage balance. For example: Let’s say your home is worth $500,000, and you still owe $200,000; this means you have a $300,000 equity on your home.

An equity growth happens not only when you own your house for some years and have been paying down the loan but also when your property’s value increases on the Real Estate market. In this case, you are lowering what you owe and increasing what it’s worth at the same time, which makes your equity even bigger.

Just to give you a real scenario of the market, according to property research firm CoreLogic, house prices in the whole of Australia have increased 16.1% from 2020 to 2021.

Here at Capta Financial we had some of our clients taking advantage of this growth and equity. One of our clients purchased a property in the Gold Coast for $570k and a valuation completed last week has returned at $720k. This is a $150k in equity growth considering the appreciation of the property alone.

How can you benefit from your home equity? 

Having equity in your house is not like having money in your bank account or in any daily liquidity investment that you can access anytime you need; however, this can still be a precious resource. 

There are a few options to access your equity without having to sell the house. One of them is refinancing your home loan to get better rates and reduce monthly repayments. Banks are also willing to give discounts on refinancing to people who have built bigger equities. 

By refinancing, you can also request a top-up to access a proportion of the home equity and use this money for whatever goals you have in life, including investing in another property. This is what people call “borrow against the equity”, using your home value as a security.

And what can you do with this money?

A very popular strategy among investors is to use part of their equity as a deposit on investment properties to expand their property portfolio without having to put any extra cash into that.

The money can also be used for other purposes such as making some renovations on the house, investing in stocks, buying a personal asset like a car, paying off other debts or even for personal use like travelling.

However, it is important to be aware of the cons involved in borrowing against your equity. When accessing your home equity, you will also increase the amount of money you owe once this is still a loan and interest rates are involved. 

Besides, you will be using your house as a guarantee, which means you can end up losing it if you can’t afford the repayments. For this reason, we always recommend you seek advice from a financial professional to understand the risks and match them with your goals.

How to grow your home equity?

If you are interested in boosting your property’s equity, there are a few things you could consider to achieve that faster. 

Make more regular or larger repayments

By paying down your loan more regularly or with larger payments, you will be able to reduce the outstanding balance faster. Consequently, you will not only reduce the interest paid over time but also own a bigger percentage of that home, which in other words means to have bigger equity. 

Opening an offset account

An offset account is an account offered by some lenders and linked to your home loan. It works similarly to a transaction account. Thus you can have access to the funds at your discretion. However, the main benefit is that the balance of the account offsets the balance of the loan. Thus, you will only pay interest in the difference. 

Increasing the property value

Another strategy to grow your home equity is to increase the market value of the house by doing some renovations. You can start with small things that won’t cost much to replace but will bring an aesthetic change and improve the look of your home, such as carpets, taps, curtains, and handles. 

And here are some other ideas:

Painting – Painting the property is also one of the most cost-effective ways to increase the value of your home. Painting the whole house, just a room or even a single wall has the power to improve the way it looks and the way people feel about the place in an inspection. 

Toilets and bathrooms  – Renovating a bathroom might be something beyond your budget, especially if you decide to replace tubs, toilets or brand new tiles. But with simple adjustments, such as giving it a new coat of paint, replacing old cabinets, changing light fittings or adding a modern decoration, you might be able to make the room look much more sleek and tidy. 

Kitchen – Having a renovated kitchen will increase a lot the property’s value. Who doesn’t think about having friends over or a nice family dinner when visiting a house that has a beautiful, tidy and cozy kitchen? And it does not need to be something sophisticated, but only practical with good space through benchtops and cupboards is enough to grab attention and bring the value a bit up. 

Outdoor area and landscaping – Upgrading a garden area doesn’t need to cost much. Simples ideas like buying (or building) a fire pit, updating fences, painting the old furniture and re-designing the plants can give your outdoor space a fresh new look.

If you want to learn more about home equity and understand how it can be used in your case, please contact us!

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