Scott Partridge, Mortgage Broker at Mortgage Choice
Buying a home is a significant purchase and usually a big investment for most. Given this, you want your purchase to work for you – so it’s important for homeowners to make building equity in their home a number one priority.
What is home equity?
Equity is the amount of your home that you actually own. It is the difference between the market value of your property and the amount owing on your home loan. Equity in your home is like having cash in the bank. You can borrow against it if needed, provided you can afford the repayments. It’s a form of compulsory saving and most importantly, it creates wealth. Here are the four commonest ways to build equity in your home using your mortgage.
- Make larger or more frequent repayments
The most common way to build home equity is by making additional principal payments when you can. Making more or higher payments off your loan than required is important because every dollar paid on the principal means a reduction in interest, as you only pay interest on the principal owing. A possible payment option is to divide your mortgage payment by 12 months, and then add this amount to each future mortgage payment. For example, if your mortgage payment is $1,200 a month, you could make your normal $1,200 payment, and an extra $100 principal payment each month. This in turn reduces the term of your mortgage – and who doesn’t want to pay off their mortgage sooner?
- Lump sum payments
If you are fortunate enough to receive a lump sum of money, such as a work bonus or tax refund, why not put it straight into your mortgage? Making one extra principal payment every year can potentially pay off your home loan seven or eight years ahead of schedule. There are a number of equity payment online calculators that show you how much interest and time you could save.
- Link your Transaction Account to 100% Offset
Linking an eligible transaction account to a 100% offset facility will allow you to reduce the amount of interest you pay, which is likely to result in the saving of interest charges on your existing loan. This could allow you to build equity in your property faster than you think. Note: You’ll need to check if these options are available on your home loan.
- Home improvements
Home improvements are a popular way to build equity. When you make home improvements, you increase the value of your home. The most sort after home renovations that buyers look for are the kitchen, bathrooms and living areas, which tend to increase the value of your home more than unnecessary structural renovations, which are largely unseen and tend to add less value to a property.
But avoid overcapitalising, which is when the cost of renovations outweighs the value added to your home in the process.
Interest rates on home equity are typically lower than personal or credit card loans. However, it is important to be aware that using equity to pay for your renovation depends on how much you can borrow and your ability to service the loan, or serviceability as lenders call it. You need to be able to afford any increase in debt, so just because you have $100,000 equity doesn’t mean you can borrow this amount.
Using equity to grow your wealth
Putting money into your home is the most reliable way to build equity. The equity you have in your home could unlock wealth creation opportunities. If your property has increased in value, the amount of equity that you could divert into an investment or renovations could create wealth opportunities.
A Word on lending
As with all loans, and particularly in light of the tightening of lending laws and reforms likely to be driven by evidence of lending practices given at the banking Royal Commission, the assessment of a borrower’s ability to repay is paramount.
It’s always a good idea to consider how much lending you take on and the best way to ensure you have a plan in place is to speak to your mortgage broker to see how much home equity you could tap into and whether it’s the right option for your needs.
________________________________________________________________________Get in touch with Scott Partridge at email@example.com. Scott Partridge from Mortgage Choice in The Hills is a Mortgage & Finance Association of Australia (MFAA) Accredited Mortgage Broker.