For most Australian households, much of their wealth is tied up in their family home. With home prices rising substantially over the past decade, homeowners are often sitting on a large amount of equity that they could use for other things.
Equity is the difference between the value of your property and the amount of debt (mortgage) that is still owed. For example, if you own a property that is worth $500,000 and you have a $200,000 mortgage, then your equity is worth $300,000. You are able to access that equity and potentially use the money to invest in things like another property.
Here are two options for your home equity.
Investment property
The most common reason a homeowner would access the equity in their home is to use the funds as a deposit on another home.
If you’re looking to build a property portfolio that will provide a passive income in the future, or as a tool to build wealth, using equity in your home can be a very powerful way to do it.
By refinancing your current home, you’re able to tap into the equity and use those funds to put down a deposit for another property. This is how many property investors have been able to purchase multiple properties from just an initial deposit.
However, there are some things you need to factor in. Just because you have equity doesn’t mean you can automatically tap into it. You still need to have enough income and the borrowing capacity to qualify for finance. You also have to remember that you will need to qualify for finance to cover two mortgages – your first home and your investment property.
Renovation
Another clever way to use equity is to tap into it to pay for a home renovation. By refinancing your home loan, you can potentially use the funds to go out and complete a renovation on your property.
Ideally, the money that you spend renovating the home will increase its value above the cost of the renovation. That way you are not only using the equity to pay for the renovation, but your total equity is actually increasing too.
You will again have to qualify for finance based on your income and expenses. It’s also worth noting that you will need to do your research to determine if undertaking a renovation will in fact increase the value of the property. The best way to do this is by comparing similar homes in your area to see what a newly renovated property of similar size, age and land component have sold for recently.
