Equity for a second property

What is equity in my home loan?

Put very simply, equity in your home loan refers to the portion of your property that you own. Over time, your equity is likely to increase as you make home loan repayments. If the market value of your home increases, so does your equity.

So, equity is the difference between your home’s current value and what you owe on your mortgage. If you have a home worth $500,000 and a remaining loan balance of $100,000, you could have $400,000 in home equity.

How do I build up equity?

Market increases help build a lot of equity in Australian homes. When the market grows, you can build equity if your property rises in value. However, there are other ways in which you can build more equity in your home. These can include:

• Renovations and improvements. Things like adding bedrooms, a new kitchen or bathroom can add value to your home. Sometimes a simple refresh like new flooring could increase your home’s value and build equity.
• Adjust your payments. The more you pay into your loan, the more equity you will generally gain. Extra repayments over time can compound and create additional equity.
• Use a redraw or offset account. If you make extra repayments, you can withdraw these funds in the future by opening a redraw facility. If you have a good amount in savings, consider opening an offset account.

An offset account is a transactional bank account linked to your home loan. Any funds in here offset the amount on which interest is calculated. For example, if you have a home loan balance of $200,000 with $20,000 in an offset account, you’ll only be charged interest on $180,000. Since you’ll be paying less in interest, you may have more money to put towards repaying your home loan, therefore increasing home equity.

How do I find out how much equity I have?

You can calculate an estimate of your home equity by taking the current market value of your property and subtracting the outstanding balance of your home loan. The balance left over is your equity, and you may be able to borrow against this. Remember, equity can vary over the years, due to repayments, any home improvements you make, as well as fluctuating market prices etc.

What else can I use my equity for?

In this article, we're talking about buying a second property with your equity as security. In many ways, home equity becomes a bit of a nest egg for people who have owned their homes for a long period. Some of the other uses for your home equity could include:

• Home maintenance and renovations.
• Large purchases, like a boat or a car.
• Debt consolidation.
• An overseas holiday.
• Pension supplement for retirees.
• Take advantage of a business opportunity.

What are the pros and cons of using the equity in my home to buy a second property?

The Pros:

Generally speaking, home equity loans are quite beneficial. Some of the major pros can include:

• You may build up equity in your second property too. By investing in a second property, you could accrue equity in that loan as the property value grows.
• Your equity in your existing home could grow again. After you have used the equity to take out your loan, the value of that property can hopefully continue to rise. As it does so, your equity can continue growing.
• Competitive interest rates. Compared to personal loans, home equity loans generally have lower interest rates. Borrowing against your existing home provides security for the lender, and therefore this type of loan could attract a lower interest rate.
• Simple application. If you have enough equity in your home and have a history of being a responsible borrower, getting approved for a loan could be straightforward.

The Cons:

• Fees. If you’re leaving one lender you may have discharge fees, plus a set-up fee for your new loan. Often these fees can be negotiable. A mortgage broker could help. It’s also worth keeping an eye on the costs charged for missing or making a late payment.
• You will have less home equity. Yep, and you’ll have more debt. So, as with any loan, make sure that you can afford to take on the extra burden.
• Lender’s Mortgage Insurance (LMI): Additionally, if you borrow more than 80% of your equity, then you’ll generally be required to pay LMI.

How do I compare home equity loans?

At iSelect we’ve partnered with Lendi to help make it easier to find a great deal on your home loan*. Click here to get started comparing from a range of lenders online, or give Lendi a call on 1300 186 260.

Last updated: 10/05/2022