You may not be on top of everything in your life, but you usually have extra toilet rolls on hand, mostly remember to change the oven clock when daylight saving ends, and you always pay your mortgage on time. The good news is – if you’ve owned your own home for a little while – you’ve probably accrued some equity.
But how does equity work and what do you need to do to access it?
Equity is the difference between what your home is worth today (its market value) and what you still owe the bank on your mortgage.
For example: your home is valued at $550,000 and your loan balance is $250,000. Boom! You've got $300,000 that isn’t owned by the bank – yep, that means it’s yours.
That's your ownership stake, the bit you truly own free and clear. It’s like having a piggy bank built right into your house.
How does equity work?
Equity grows in two main ways. The first one is paying down your loan.
Each mortgage payment you make is like dropping another gold coin into that home piggy bank. It chips away at your debt and adds directly to your equity.
Over time, those payments really stack up, and you'll be surprised how quickly it grows.
The second way is when your home's value increases, your equity gets a serious boost. The upgrades you make (like that stylish new bathroom), your home’s location, and overall market trends each play a part in this. If your neighbourhood becomes the ‘it’ spot, your home value – and your equity – could go up.
How to access equity.
So, how do you figure out the equity in your home? The first step in understanding and accessing the equity in your home is knowing your home's value.
This is the crucial first step to unlocking your equity. It's like taking your grandmother’s vase to an episode of Antiques Roadshow and finding out you're sitting on a rare ceramic masterpiece from the 1800s, or just a very nice antique.
Online tools are handy for an estimate of what your equity might be; however, a professional valuation gives you the official number that lenders will use to determine equity in your home.
After you’ve calculated the equity in your home, it’s important to seek some advice on what to use it for. Chat with your ME Mobile Banking Manager about refinancing or a loan top-up.
Refinancing could get you access to your hard-earned equity and maybe even a better interest rate, saving you money in the long run.
What can you do with your equity?
Buy a second home.
How does equity work when buying a second home? The good news is home equity can give you a much-needed boost when buying an investment property. The equity you’ve accumulated on your first property can be used as a deposit on any subsequent properties.
It's a strategic play to grow your financial portfolio without needing to save for a second deposit. Envision owning a second property where rental income contributes to the mortgage payments – leading to potential capital growth.
Use equity to renovate.
Turn your equity into that dream kitchen makeover, an extension to create more space, or even a pool for those hot summer days.
Using equity for renovations could increase the value of your home without needing to save up to pay the builder. You get to enjoy the improvements now while potentially boosting your home's long-term value – all while staying on top of your regular mortgage payments. It's a win-win!
Redraw from your home loan.
If you’re ahead with repayments, you might be able to use redraw to dip into your equity. That means accessing the extra capital you’ve paid down, not the entire balance of your equity, so you’re limited to the value of those additional repayments. That may not be enough if you’re planning something big like a home renovation.
You could also consider a loan top up. This means increasing the balance of your loan, then using that money to further invest.
Loan top up.
A loan top-up is like giving your mortgage a turbo boost by borrowing against all the equity you’ve built.
Just remember, this isn't a magic money tree. You'll need a solid plan to pay it back. Think of it as borrowing from your future self – make sure future-you will be happy with the arrangement.
Refinance your home loan to access equity.
Refinancing your home loan to access equity can be great for two reasons:
1. You can tap into the funds you need.
2. It’s a chance to secure a better deal than your current home loan.
Yes, refinancing does take a bit more effort than asking a kind billionaire, but it could mean savings with a lower rate, better loan features, or just the pleasure of a great new lender.
Equity all summed up.
Accessing your home equity could be a helpful way to grow your financial portfolio, however, there are risks associated with using this money. Here are some pros and cons to accessing the equity in your home:
- The more you pay off your mortgage, the more equity you build.
- Equity isn't fixed: it changes all the time.
- Equity isn't ‘free money’. Your access depends on your finances and using it increases your loan balance.
- Market swings matter. A hot market can skyrocket your equity, while a slow market might mean it grows at a slower pace.
- Chat to a financial advisor to understand the details and plan wisely and borrow responsibly. You don’t want to overextend yourself.
Meet ME.
Want to know more? One of our ME mobile banking managers can help guide you through the process of unlocking your home's equity.
Book a time to talk
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.