How to access the equity in your home
If you are one of those people who’s been regularly making your home loan repayments for the past few years, then you’ve probably built up some nice equity. And if you’ve owned the property for a good while - a few years at least - then house price rises (assuming they’ve increased in your location) may well have added to it; perhaps significantly!
While these offers may sound enticing, they often come with hidden catches that could leave you worse off financially. Falling for clickbait home loan ads can lead to unexpected costs, wasted time and frustration. Here’s why you should approach these offers with caution and how to make more informed decisions.
Equity? What’s that exactly?
If you’re unsure what equity is, it's the difference between how much you owe on your home (the loan) and how much your home is worth as a dollar value. Let’s say that you’ve paid down your loan to $350,000 and your home is now worth $750,000 - then that’s $400,000 of money that’s yours. And not the bank’s.
If, like many of us, you want to build your wealth, then it may be worth putting some of that equity to good use. Here are some ways you could consider.
1.Find out how much equity you have
This is a pretty important step.
First, you’ll need to find out the value of your home. This can be done via a valuation. A valuer that you can hire privately will come to your home and look at things like the condition of your property, how many bedrooms it has, where it’s located and how many kinds of cereal you have in your pantry. OK, perhaps not the last one.
Once you have a valuation you’re comfortable with you need to check the remaining balance of your home loan - a statement from your lender or your online account (if you have one) will give you the most accurate figure. Then, jump onto HoLo’s Equity Calculator and BOOM: the difference between the two numbers is your equity.
However… it’s not your available equity. More on that below.
2. Know what you want to use it for
Even though it can seem like free money, the equity in your home is something you’ve earned, even though it may not immediately seem like it. It’s a result of your decision to buy when and where you did, the effort you’ve put into maintaining it and the financial sacrifice you’ve made from gradually repaying any finance on it. It’s a return on your investment - in many ways. Think carefully about how you might spend it. If you want to continue to add to your wealth, smart uses include:
Renovations or refurbishments on your existing home.
Investing outside of property, like in shares.
Putting down a deposit on an investment property.
While a fancy new car and all-inclusive round the world holiday may be tempting, neither are going to allow you to add to your wealth, no matter how enjoyable the experiences may be.
3. Redraw from your loan
If you’re ahead with repayments, you might be able to use redraw to dip into your equity. That means accessing the extra capital you’ve paid down, not the entire balance of your equity, so you’re limited to the value of those additional repayments. That may not be enough if you’re planning something big like a home renovation.
You could also consider a loan top up. This is as easy as getting in touch with your lender and asking to add a bit more onto the balance of your loan and using that money to further invest.
4. Refinance your home loan
Refinancing your home loan to access equity can be great for two reasons:
You can tap into the funds you need.
It’s a chance to secure a better deal than your current home loan.
Yes, refinancing does take a bit more effort than a loan top up or asking a kind billionaire but it could mean savings with a lower rate, better loan features or just the pleasure of a great new lender.
5. Avoid putting yourself under financial stress
You know when you were a kid and you had five dollars and you wanted to spend it so badly your whole body hurt, but your parents made you save it so you could “learn”?
Just because you have equity, doesn’t mean you have to use it. Your access to it will depend on your current income, financial history, living expenses and the amount owing. There may also be additional fees associated, and, of course, using your equity means your home loan balance will increase.
If you’d like to know more, book an appointment - it’s easy on your personal dashboard - or contact us.
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