As mentioned in our previous blog, owning property is one of the most effective ways of building wealth. The real value of your home lies in the equity raised and when you have raised enough equity, you have the option to access it. Here are our top ways to make the most of the equity in your home.
Home renovations
Typically, if you’re completing minor, cosmetic renovations, the process of accessing your equity is simple. Major renovations, on the other hand, can get a little more complex. This is because you’ll usually need council-approved plans and a fixed-price building contract ready to go before you can sort out your finances.
Completing renovations can be a great way to add to your equity even further by increasing the value of your home. For example, if you borrowed $20,000 from your equity to spend on a new kitchen and doing so increased your home’s value by $40,000 – you’ve just made $20,000 in equity.
Unfortunately, pouring money into your home doesn’t necessarily equal higher home value. You’ll need to make sure the improvements you’re making are going to add value to the home, otherwise, you might overspend instead of increase equity.
Buying a second property
If you’ve got enough equity available, you could potentially use it to purchase an investment property. Buying an investment property can be a great way to build up your property portfolio and potentially accelerate your wealth growth with capital gains.
Typically, you’ll only be allowed to access 80% of your home’s value minus any debt owing on your mortgage. For example, if your home is valued at $700,000, and you have a $390,000 mortgage, you are able to access $170,000 to use for investment, compared to the $310,000 of equity you’ve accumulated.
* Despite its benefits, it’s important to remember that by taking on a second mortgage, you’re now responsible for making two mortgage repayments each month. Keep in mind that there could be times when the property isn’t tenanted, or when an expense comes out of nowhere and throws your budget out of whack – this won’t stop your mortgage obligations.
Investing in other assets
Another way you could use your home equity is to invest it in other assets like shares. This way, all of your money isn’t tied into one big asset, i.e. your home, and you have a more diversified investment portfolio.
Also known as ‘gearing’, you could borrow from your equity to invest in shares. Any returns or dividends you earn from this can be later put towards paying off your debt. Plus, interest paid on your investment loan (the equity you borrowed to buy the shares) can be listed as a tax-deductible expense.
Selling to buy another property
The last option is selling your home and buying another property. You could use the equity raised in your current home as a deposit on another one once you’ve sold, so you’re not tied up by owning two properties. This can be a great steppingstone to go from one house to an even better house, without breaking the bank saving for a deposit.
Is using the equity in your property right for you?
Using your equity might seem like a no brainer, there are so many ways to access it and so many things to do with it, but is it worth it? Before you decide whether tapping into your home equity is the right move for you, you need to consider the pros and cons:
Pros:
- Access to money: The biggest, most obvious benefit to accessing your home’s equity is the large amount of money you have access to. As mentioned, you can use this money to continue to grow your wealth, or even just take the family on an expensive holiday.
- Boost the value of your home if renovated: As we mentioned earlier, if you use the equity to add value to your home, you could end up with even more equity.
Cons:
- Larger repayments owed: When you tap into your equity, you’re essentially undoing all of the hard work you put into paying off your mortgage. This means you’ll likely need to pay larger instalments, because you’ve got a higher principal and will therefore be charged higher interest.
- Risks: Depending on what you choose to do with your equity, there is likely going to be some risk involved.
- Interest compounds over time: Depending on how much you borrow and how long it takes you to pay it back, you could end up paying a lot more in interest. Whether you end up better off, will depend on what you used the money for and whether you made a profit.
If you have questions or would like to discuss your options please don’t hesitate to contact one of our friendly home loan experts.
Disclaimer:
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.
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