Do you own a house, unit, apartment or some other sort of property? Home equity is the current agreed value of your property minus any loans you have taken out against it. Equity works the same for investment properties and a principal place of residence.
Here is a little example of how equity can work –
Why is it important?
Because, you can benefit from your home equity. For example, one way to benefit from your equity is to sell your house. You pay the bank whatever is left of your mortgage from the sale price and keep the difference. You can then buy another property or investment using the equity.
Another example, is to refinance your existing mortgage. If your property has increased in value the bank may offer you an additional or larger loan. However, how much larger will depend on things like your financial position and/or what you plan to use the money for.
ASIC and MoneySmart have produced a helpful booklet that explains the ways you can use your home equity and all of the pros and cons if you choose to do so. You can read it here.
How do you know what your home equity is if home values change?
You can ask a licensed valuer (like those who work with Blocksidge & Ferguson) to value your property. Once you know what your house is valued at you can get an idea of what your equity is.
Alternatively, if you’re arranging a mortgage, your bank will have your property valued. Based on this valuation the bank will determine how much they’re willing to lend to you. Most banks won’t let you borrow more than 80% of the property’s value. However, some lenders will consider it, at a price.
What are some ways to make the most of your home equity?
There are lots of options such as consolidating your debt, renovating, buying an investment property, or even helping the kids put a deposit together for their own home. However, you should always seek independent financial, investment and taxation advice before making a decision about using your home equity.