Home Equity Explained

Home Equity Explained

If you’ve been paying off your mortgage for a few years, you’ve likely built up some equity. Equity is the difference between the current value of your home and how much you owe on it. Your equity is probably your greatest asset. Refinancing is a common strategy to access this valuable equity, enabling you to fund renovations, invest in property, or achieve other goals.

Calculating Your Home Equity

Let’s assume:

• You purchased a house for $500,000 with a $100,000 deposit (20%).
• Your loan was $400,000.
• Initially, your equity in the home was $100,000.

Over time:

• Your home is now worth $600,000.
• You’ve paid off $50,000 from the principal.
• You now owe $350,000.
• Your equity is now $250,000.

As a percentage: Subtract the loan value from the home value, then divide the result by the home value.

Using the above figures:

• $600,000 Home value
• $480,000 (80% of home value, maximum loan amount)
• $350,000 Current loan amount

So:

• $480,000 - $350,000 = $130,000 (The amount of equity you can access without incurring LMI costs)

Building Your Equity

Building equity is one of the primary financial benefits of homeownership. Here are a few ways to increase your home equity:

Making Loan Payments

Paying only the interest on your mortgage doesn’t increase your equity. To build equity, you need to pay both the interest and the principal. Over time, this progressively decreases the principal.

Paying Larger or Faster Loan Payments

The more you can pay off your mortgage, the sooner you reduce your principal. Paying weekly or fortnightly instead of monthly can also reduce your principal faster, thanks to the compounding effect.

Home Value Appreciation

Your equity will grow as your home appreciates in value. Most property values increase over time, although they go through cycles. If your home appreciated by $30,000 in the last year, your equity has also grown by $30,000.

Home Improvements & Renovations

Investing in home improvements can significantly accelerate your equity growth. For example, spending $30,000 on a new kitchen can increase the value of your home by more than the $30,000 you spent. A wise investment might increase your home’s value by $45,000 or more.

Using Home Equity for Investments

Using your existing home equity to buy an investment property is a popular strategy. The equity in your home can serve as a substitute for a cash deposit. Different lenders have different rules, so it’s important to talk to a good mortgage broker for advice.

Welcome Home

At JKL, we’re here to support you in making the most of your home equity. Whether you’re looking to renovate, invest, or achieve other financial goals, our experienced team is here to guide you every step of the way.

Experience our JKL real estate family. We’ll put the welcome mat out for you!