Unlocking the Equity in Your Home
The amount of equity you have in your home and how it can be used is something that every home owner should be aware of. So, what exactly is equity and how is it calculated?
Home equity is simply the difference between the value of your home and the debt against it. When you hear someone talking about loan to value ratio (or LVR), they are really talking about the amount of equity in the property.
There are basically two ways to increase the equity in a property. These are either reducing the debt or increasing the value of the home. Reducing the debt is achieved by simply paying down the balance, either in regular payments or lump sums. An increase in value of a home usually occurs if the property market increases, but you can also achieve this by adding improvements to the property. It is important to remember however that not all improvements add value so make sure you do your research here.
Once you have grown the equity in your home you are then potentially in a position to use that equity for other purposes. Some ways you might want to take advantage of the equity in your home are:
Qualify for a Lower Interest Rate:
Lower loan to value ratios will often mean a lender is willing to offer a lower interest rate as there is less risk in the transaction for them. Reviewing the value of your home and home loan with your mortgage broker every year will identify if and when you might qualify for a lower rate.
Equity in a home can be used to consolidate debts with higher interest rates. This can generally save you money and allow you to put more towards clearing those debts. An important note here is that you must have a clear payment strategy to pay the consolidated debts off over a set period, otherwise you may end up paying off those consumer debts for the life of the mortgage. This could cost you a lot more in the long run. Your mortgage broker can help you work out a repayment schedule and loan term to assist here.
Purchase a Vehicle or Other Asset:
Some people choose to use the equity in a property to purchase a vehicle or other asset. Again, as with the debt consolidation, it is important to have a clear strategy so you don’t end up paying for the car for the whole mortgage period.
Purchasing a New Property:
Increasing the equity in your home can allow you to purchase a new home, either a new owner-occupied property or an investment property.
You may wish to use the equity in your property for further investment purposes, whether that be in a new property, or something like shares and managed funds. Before you consider this, it is a good idea to consult your financial adviser regarding your situation, goals and strategy.
Whatever your intentions, increasing the equity in your home is always a positive, even if it is simply to reach the goal of eliminating your mortgage. For more information about how you can use the equity in your home contact us.