Accessing Equity in your Home
Questions we often get asked by our clients are: What is equity? Can I use the equity in my home? If so, what can I use it for?
If you own a home or investment property you may be able to access equity in your property for a variety of uses in order to achieve your financial goals. But first…
What is equity?
First and foremost, it is probably a good idea to understand what equity is. Equity in property is the difference between what your property is worth and what you owe on it. So if you have a property worth $500,000 and a loan of $200,000 then the equity in the property is $300,000.
Equity = Property value – Home Loan Balance
Can I use all the equity in my home?
Most lenders will allow you to borrow a maximum of 90-95% of the value of a property with Lenders Mortgage Insurance (LMI) and up to 80% of the value of the property without LMI.
Using the example above, on a $500,000 property with an existing $200,000 loan, you could borrow an extra $200,000 bringing your total lending to $400,000, which is equal to 80% of the value of the property. However, if you are happy to cover the costs of LMI, you could borrow up to $450,000-$475,000 (90-95%) of the property value.
How much will the bank lend me? How much can you afford to borrow?
While you may have equity in your property that does not necessarily mean you can borrow against it. You still need to be able to demonstrate that you can afford (service) any lending that is being taken out.
All banks vary slightly on how they assess your borrowing capacity (the amount they are willing to lend you). They take in to account your income, existing debts and obligations, credit card limits and a number of other factors. Check out our calculators to get an estimate of your borrowing capacity, or give us a call and we can help you work it out.
It is important to know that there is a difference between how much the bank will lend you, and how much you can actually afford to borrow.
So it is important that you are comfortable that you can afford any lending that you are considering – both today and into the foreseeable future. One way to work this out is to ask yourself how much you’re saving every month. If the new loan repayments are covered from savings (at both current loan interest rates and if rates went up 2-3%) then this is a good indication that the new lending is affordable.
It is important to personally evaluate what you can afford and to feel confident that you can meet your expected loan repayments. We like to make sure your loan is set up to meet your long-term goals and are always happy to help you crunch the numbers in order to work out loan affordability.
What can I use equity for?
If you can afford the loan and have a reasonable purpose for the finance, then you can use equity for almost anything.
A few of the more common purposes include:
- Buying another property
- Investing in shares or managed funds
- Building or renovating a home
- Consolidating your debts (such as credit cards, personal loans into your home loan)
- Buying a new car, boat or toys
- Buying a business or investing in an existing business. (see our business article).
- Large expenses such as weddings or medical expenses
- Assisting family to purchase a property
This is not a comprehensive list but it is a good start. Please don’t hesitate to contact us to discuss other ways you can use equity in your home.
Is it easy? How do I get started?
The starting point for releasing equity in property is to ascertain what equity you have and what your borrowing capacity may be.
Ultimately the lenders determine the value of your property(s) but we can generate an estimate of your property’s value using a number of tools we have. We can also order a bank valuation at no cost to you and before you spend time on a loan application (in most cases).
At the same time we can talk about the affordability of any loan you are considering.
Then if everything is right, we can proceed with a loan application on your behalf
Give us a call if you want to talk about unlocking equity in your property.