Most people enter a home loan with the eventual goal to own their property outright, in other words, building equity in your home. Equity is essentially the difference of what you owe on your property to how much it is worth. The equity you own in your home is the property’s market value minus what you owe on your home loan. For example, if you home is worth $600,000 and you have $300,000 left to pay on your home loan, you have $300,000 in equity. It gives you a Loan to Value Ratio (LVR) of 50%.
Home equity takes into account the market value of your property as well as the repayments made. Therefore, as time passes and you continue to make regular repayments, your equity is likely to grow until you own your home in its entirety.
Building equity in your home
The most common question after ‘what is equity?’ is ‘how do I get more of it?’. Luckily, there are some achievable strategies you can use to build the equity in your home dependent on your situation:
- Increase your property’s market value through renovation. Invest your time into planning, research and finding good quality trades and materials. Make sure you’re making your money work it’s hardest; invest in kitchens, bathrooms, additional bedrooms and areas that may appeal to potential future owners such as outdoor entertaining areas. Avoid pouring money into trend-based fittings and fixtures that will drain your funds and return limited bang-for-buck. You may wish to unlock some of your current equity to invest into your renovations. Our home loan specialists can talk you through how to do this.
- Increasing your repayments. You may elect to direct debit an extra amount into your home loan per month (be sure to check your loan accommodates extra repayments or if they attract any fees). You could also increase your repayments slightly by switching to fortnightly repayments, like in this example:
Annie and Matthew have borrowed $380,000 on a 25 year term at a rate of 6%. by making slightly higher repayments fortnightly (calculated by dividing the monthly payment by 2), they would end up making an extra monthly payment each year. This would mean they could pay off the loan 4 years early and save about $65,000 in interest.
Making comparatively small supplements in the first 5 to 8 years of your loan (when most of your payments go towards paying off the interest) can give you much larger gains when building equity and paying off your home loan faster. Similarly making lump sum payments like savings or inheritance, particularly in the earlier years of your loan, can shave years off your repayments.
- One of the simplest ways to build equity faster and minimise your interest repayments is an Interest Offset Account. An account connected to you home loan, the savings you put in are directly offset against your loan daily. This means if you have a $300,000 home loan and hold $50,000 savings in your connected offset account, you will only be charged interest on $250,000 of your home loan for that repayment period. LendingPro can help you find a home loan with features like offset accounts and flexible repayments.
- Use your equity for investment. Say you have a $600,000 home and you owe $400,000 on it. You may wish to use part of the $200,000 in equity towards a deposit on an investment home. As a result, there is an opportunity to begin building equity in multiple properties, as well as claim tax deductions and depreciation. See how much you could borrow for an investment loan here.
With a little extra knowledge and some strategic planning it’s possible to shave years off your home loan. It’s never too late to consider how you could build equity in your home more quickly and reap the rewards in the future. Apply for a home loan now, or chat to us about refinancing your current loan here.
The information in this article is of a general nature. It is important to obtain financial advice specific to your circumstances.