A basic guide to equity
Equity is the value of your property after you remove any financial commitments. Equity increases as you pay off your mortgage and organically through capital growth.
Let’s look at a scenario to break it down:
Property value = $400,000
Loan = $300,000
Equity = $100,000 (please note lender policies avoid you accessing all of your equity)
What can I do with equity?
Equity can be used in a number of ways, but a little caution will go a long way. You have saved hard to pay off your mortgage and accumulate this wealth and it needs to be treated with care like all your major financial decisions.
Equity in property is commonly used to secure investment properties. Other uses for equity are almost endless, but common uses include renovating your current home, investing in shares, consolidating debts and even splurging on cars and holidays.
What does this mean for my home loan?
Accessing the available equity in your home means that your home loan will increase, consequently increasing your repayments. Depending on your loan, you may need to refinance to ensure that your loan product has the necessary features to accommodate a new financial structure.
Equity can be a smart and easy way to gain financial freedom sooner than you would have otherwise expected. If used with caution it can be an excellent strategy to build wealth.