The ins and outs of using equity in your home
Many homeowners think that if they’ve been diligently paying off their mortgage, they have instant equity in their home. Yet, that’s not always the case. Mozo Property Expert, Steve Jovcevski, explains when, how and why you can use the equity in your home and when it’s probably not a good idea.
What does “equity in your home” actually mean? This is how much you own but is not necessarily liquid cash. Unfortunately, people often think they have more than they do.
If you have borrowed 80% of the value of your property, and paid off a further 10%, you only have 10% of equity in the property rather than 30% of the property’s total value. But even then, it’s not your own personal ATM. Accessing equity comes as two options.
Paying your mortgage on time and over a long period doesn’t actually create any equity in the property, you have to be ahead on your mortgage to be able to re-draw on it.
Many people don’t realise they may be ahead on their mortgage and that this is an option for them. For example, you may decide to keep repayments the same despite a previous rate cut, which would put you ahead and this would be listed on your home loan statement as available re-draw.
Because this is your money, it can be used however you like with no minimums and you’re only limited to how much is there.
No matter how long you’ve had your mortgage or the value of your home, you may be able to access the equity in your home as a separate loan. This is charged at the same rate of interest and given at the discretion of your lender.
The loan should be for a purpose like investing in the share market, renovating your property or purchasing another property.
For this, you would need to get your lender to value the property which will dictate the amount they are willing to lend, usually capped at $100k, and be clear about your intent for the money. In either of the above scenarios, the rule of thumb is that you can never borrow above 80 per cent of the property’s value, even if you own it outright.
Expert tips for accessing equity
- If you’re accessing large amounts of equity from your home, it should be for an investment purpose.
- Know your limits. Don’t access equity if you know you’ll be tempted to spend it on a luxury car or designer wardrobe.
- Write down your intention for the money and don’t leave it sitting in the bank for too long, tempting you.
- If you have the ability to re-draw on your loan, choose this option over taking out an additional loan on the property.
- Don’t assume you have a certain amount of accessible equity-, only your bank can decide whether to actually lend it to you.
- Lastly, remember that any extra borrowing adds to the length of the loan term.
About the author: Steve is Mozo’s resident Home Loan negotiator. He helps Aussie home buyers secure the best possible rate possible from a broad range of home lenders. Steve is also an avid property investor in his own right, investing in Sydney properties for over 20 years. Steve is full of practical tips to help first home buyers, refinancers or investors build and get the most out of their property portfolio.