One of the major benefits of owning property is building equity within it. If you own property or are thinking about purchasing property, it’s important to understand what home equity is, how you can grow it faster and what it can be used for.
What is home equity?
Home equity is defined as the difference between the market value of your home and the amount of money you still owe on it. As payments are made towards your home loan over time, the equity in your home increases.
For example, if you have made $80,000 in payments towards your property and the market value of your property has increased by $20,000, you have a total of $100,000 in home equity.
How to grow your equity faster
Taking active steps towards growing your equity faster can enable financial stability and wealth improvement for you and your family in future. Whilst the equity in your property will naturally increase over time, there are a few ways you can fast-track its growth:
- Reduce the size of the home loan by increasing the frequency of repayments
- Utilise an offset account to reduce interest repayments on your mortgage
- Undertake home renovations or improvements that add value to your property
Using your home equity
So, what can you do with this equity? Equity can be used in a number of different ways. If you’re considering investing in another property, your equity can be used towards a deposit or to save on lenders mortgage insurance, for example.
Equity can also be used to undertake renovations (which can have the added benefit of improving the value of your property and therefore your equity in it), as well as being able to use it towards alternative investments such as shares or other big-ticket items.
Considerations and risks
Whilst understanding equity and the ways it can be used as a strategic investment is important, so too is understanding the risks if you do. This includes understanding:
- How much your repayments to your lender will increase by
- Evaluating your financial position in the event of a rise in interest rates
- If you have the household budget to accommodate additional costs, and;
- If you are able to access equity in your property with your current lender
Wondering where to from here? As with any financial decision, it’s important to seek professional guidance which is tailored to your individual circumstances. Please note this information should only be treated as a guide.