Equity To Invest

What is home equity?

Equity is the portion of your home’s value that you own. In short, it’s the difference between the current market value of your property and your remaining home loan balance.

So, equity is usually built by making home loan repayments or having your home increase in value. Value can be increased through renovations and improvements, or changes in the property market.

How do I know if I have equity in my home?

It’s simple to estimate your equity. If you subtract the amount owing on your mortgage, from the current value of your home, that should give you a good idea of what equity you have in your home.

For example, if your home is currently valued at $600,000 but you still have $200,000 left to pay on your loan, your equity is $400,000.

Equity varies over the years. Property values change, you pay more off your mortgage, or you may have done home improvements which increase the value of your home.

What is a home equity loan?

With a home equity loan, you borrow money against the existing equity that you have accrued in your home loan. The loan is typically secured against the value of your property.

What can a home equity loan be used for?

In this article, we’re specifically talking about using the money you borrow to invest in something other than property. In this case, as the money is secured against your existing property, you can invest in whatever you choose. Obviously, careful consideration of any investments is advised.

Here are some other things that you may use your home equity loan for:

• Home renovations.
• Expensive maintenance (e.g. if you need a new roof).
• Buy a car, boat, or some other large purchase.
• Consolidate your existing debts.
• Overseas travel.
• Establish a business.
• Lifestyle funding for retirees.

What are the advantages of home equity loans?

There are a few very positive advantages of home equity loans, these include:

• Lower Interest rates: Home loans tend to have lower interest rates than many other loans, including credit cards and personal loans. The property you’re borrowing against gives added security to a lender, and that lower risk could translate into a lower interest rate.
• Flexibility of use: With a home equity loan being secured against your property, you can generally use the funds however you wish.
• Simple to apply for: If you have the equity in your home, it should be straightforward to prove, and get your loan.

Are there any disadvantages to a home equity loan?

The disadvantages of a home equity loan are generally applicable to almost any loan. Here are some things worth considering:

• Set-up fees and discharge fees. If you’re leaving one lender and moving to another, be aware that you may have to pay discharge fees, followed by a set-up fee. If you’re staying with the same lender, it may well be wise to negotiate. Consulting a financial adviser or mortgage broker could help you save money.
• Other fees and costs. As with any loan, check the costs you’ll be up for if you miss or make a late payment. Lenders also may charge annual or monthly service fees, especially if you have a home loan feature like an offset account.
• Increased debt. You’ll be taking out a loan, so it stands to reason that you’ll have increased debt. So, your monthly payments may be higher and it could take you longer to pay back.
• Reduced home equity. By borrowing against your equity, you are reducing it. Equity can be a hidden ‘safety net’ if life changes and urgent money is needed.
• Lender’s Mortgage Insurance: If you borrow more than 80% of your existing equity, you may be required to pay Lender’s Mortgage Insurance.
• Loan term: Taking out a home equity loan will also increase your debt levels, as well as lengthen the amount of time in which you’re required to make regular repayments to cover both the loan principal and interest.

How can I build more home equity?

As mentioned earlier, there are ways to increase your home equity. If the housing market is rising, then often your home equity can increase as well. However, there are other things you can do to help your equity grow:

• Home improvements: A good renovation should improve your home’s value. Features like new kitchens and bathrooms can help.
• Make additional repayments: Over time, even smaller additional repayments can mount up and provide more equity. Extra repayments don’t have to be regular – you can usually make lump-sum extra repayments too.
• Pay fortnightly instead of monthly: Because home loan interest is calculated on a daily basis, paying into your loan more often can save you money and increase equity in your home.
• Reduce your interest payable by using a redraw facility or offset account.

How do I find a home equity loan that suits me?

iSelect has partnered with Lendi to help you compare home loan products from a range of Australia’s lenders. Get started comparing home loans from 25+ lenders online the easy way, or give Lendi a call on 1300 186 260 (08:30-18:30).

Last Updated: 07/07/2022