Simply put, equity is the value of your property after subtracting the amount you owe on it. If you have paid a decent portion of your loan or if your home has increased in market value, you can use the existing equity in your property to purchase an additional property, renovate your home or fund other lifestyle or investment purchases.
It’s an especially valuable resource when it comes to property investment. This is because it allows you to build a portfolio without saving up for a deposit.
How it Works
If the market value of your existing home is $400,000 and you still owe $200,000 on your mortgage, you have equity of $200,000. As an investor, you can generally access up to 80% of your home equity ($120,000 in this example). The 80% of existing house is $320,000 less the loan amount$200,000 then $120,000 of equity can carry forward to a new purchase.
If you wanted to buy an investment property with a market value of $400,000, a lender will typically fund 80% (LVR subject to change )of the property’s market value ($320,000). The available equity from existing house $120,000 and you need a top up $40,000 from your savings to purchase your investment property of $400,000.
How Much Equity Do You Have?
To find out how much equity you have in your home, you need a professional property valuation. During the valuation process they will look at multiple aspects of your home, including:
- Building structure and condition
- Presentation and fit-out
- Access (parking, vehicle access)
- Local zoning and planning restrictions
The valuation process also involves looking at recent comparable sales in the area and market conditions along with these attributes to produce a valuation report.
Building Equity in Your Home
You may find you don’t have sufficient equity in your home to fund further investments after getting a valuation. Fortunately, there are a number of ways you can build equity in your home, including:
- Increasing property value through renovations
- Reducing your loan balance
- Opening an interest offset account, allowing you to offset your savings against your loan balance, reducing the interest you pay on your loan
Keep in mind that using the equity in your home means the total amount you owe on your home loan will increase, which may lead to higher monthly repayments. Many property investors argue that the biggest priority is to repay the loan on your home as soon as you can.
When house prices change, your loan stays the same. This means if house prices go down, you could be left owing more than the value of your home. If your income changes, or if interest rates increase, your repayments on a bigger loan may be harder to manage.
Contact Mortgage Masters – Independent Brokers in Auckland
Mortgage Masters are your independent mortgage brokers in Auckland, servicing the community in home loans since 1998 to find our clients the best deal on the market. If you need tailored financial advice or helping finding the right home loan for your needs, please get in touch with our team today.