Accessing your home equity

You might have found yourself in a position where you’re looking to invest in property or thinking about renovating an existing one. Using the built-up equity in your current home is a savvy way to help finance your next venture. If it’s done well, it can be a useful strategy to get on top of your finances. But what are the associated benefits and risks?

Equity in a nutshell

Equity is the difference between the value of your property and the amount of your remaining loan against it. For instance, a home valued at $900,000 with a $600,000 loan outstanding would have $300,000 worth of equity. As long as you keep paying off your loan and as your property value increases, you’ll build equity. You can also further build equity by making larger repayments, lump sum repayments or renovating.

How much equity can I use?

Lenders usually set a 80% to 90% limit on the amount of equity you can use. This provides the lender with a buffer in the event of fluctuating property prices or interest rate rises, in case they need to foreclose the property to discharge the loan. In other words, the 10% to 20% buffer helps to protect lenders against too much risk exposure. Using the above example, a home valued at $900,000 with a $600,000 loan would have between $120,000 to $210,000 equity available for further investing.

Will I need a new mortgage?

Using the existing equity in your home is potentially a much more straight-forward process than applying for a new mortgage. The lender already has your property as security for your existing home loan, so it’s a matter of borrowing additional funds against the value of that property, provided the lender can be satisfied that your application otherwise complies with its normal credit assessment and loan suitability criteria. You effectively pay your loan as normal, but have the added advantage of tapping into the value in the property for other uses. You’ll need to sign a new loan contract, often called a top up or home equity loan but the process can be faster than applying for a new home loan with a different lender.

How can I capitalise on my equity?

Buying an investment property

You can refinance your current home loan to access your equity and use it to invest in a rental property. You’ll usually enjoy capital gains and the rent you receive can help pay off your mortgage or give you funds to invest further.

Renovating your home

Got an idea to improve your existing home? Accessing your equity could help turn those renovation goals into a reality sooner. When done properly, renovations can substantially increase the value of your property and help maximise the resale value of your property in the future. It is also important not to make improvements that exceed the value of your property, this is also known as overcapitalisation.

Funding for other purposes

Perhaps you’re looking to consolidate a number of debts into one monthly mortgage repayment to help you get on top of your finances. Or you simply have to sort out some pressing financial needs. Whatever the case, you can use your equity to free up cash for a variety of approved purposes.

Downside of using equity for investing

It can be a big step forward when you’re about to buy an investment property or consolidating debts. But when you’re financing it using the equity in your home, you should be aware of the possible risks. Whether you choose to finance your venture by redrawing from your existing loan, applying for a top up or by refinancing your existing loan, you should consider the value of your home, your credit history and your ability to meet your repayments before you borrow against your home.

Investing in the property market is essentially a financial gamble – no matter how well you may calculate it. As such, when you use your existing equity to invest, you’re effectively taking a huge financial risk – you’re risking that the existing property will maintain its capital growth and that you will be able to achieve a return on your investment.

When you use existing equity to borrow more funds, the amount of the property that you effectively own is significantly reduced. If the investment performs poorly, you may be in a less than desirable position, compared to what would happen if you’d left the equity alone. That’s why it’s important to research the market thoroughly before investing and ensure that your finances and emotions can cope with the worst case scenario – should the unfortunate happen.

Tax considerations

The interest paid on a home equity loan in some instances may be tax deductible. However we recommend you speak to your accountant or tax adviser to get more information and determine whether borrowing against the equity in your home is an appropriate strategy for you.

How much can you borrow?

You can use our Borrowing Power Calculator to help you work out how much you can borrow and what part your equity can play.

If you’d like to find out if refinancing is the right option for you or learn more about equity, get in touch with your trusted Mortgage Broker to discuss your home loan options.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.