Summary:
Home equity can be a game-changer for Australian homeowners looking to fund renovations or make new property investments. As you pay down your mortgage or see property values rise, equity builds, offering a resource you can tap into to achieve your financial goals. With home equity financing, you have flexible options—whether it’s a loan for a kitchen remodel or using the funds as a deposit on an investment property. This approach lets you leverage the value of your property to grow wealth or enhance your living space, and the process is smoother with the right advice from an experienced broker.
As an Australian homeowner, you own a valuable asset that could help you achieve your financial goals.
Whether you’re dreaming of a stunning kitchen renovation or eyeing an investment property, home equity financing might be the solution you’ve been searching for. It offers a powerful way to tap into the value of your property, potentially providing you with the funds needed to transform your living space or expand your property portfolio.
In this article, we’ll explore the ins and outs of home equity financing, how to calculate your available equity and how you can use it to your advantage.
What Is Home Equity Financing
Home equity financing is a method of borrowing that allows you to access the equity you’ve built up in your property. Equity is the difference between your home’s current market value and the outstanding balance on your mortgage. As you pay down your mortgage or as your property’s value increases, your equity grows.
There are several types of home equity financing options available to Australian homeowners. One popular choice is a home equity loan for renovations, which provides a lump sum that you can use to fund home improvements. Another option is a home equity investment loan, which allows you to use your equity to purchase an investment property. Home equity loan financing combines the benefits of traditional home loans with the flexibility of accessing your property’s value.
When considering home equity investment, it’s crucial to shop around and compare home equity loan interest rates from different lenders. These rates can vary significantly and will impact the overall cost of your loan. Remember that home equity loans are secured against your property, so it’s essential to understand the terms and ensure you can meet the repayments.
How To Calculate Equity in a Home
Before you can tap into your home’s equity, you need to know how much you have available. To calculate home equity, you’ll need two critical pieces of information:
- Your home’s current market value
- The outstanding balance on your mortgage
Subtract the outstanding mortgage balance from your home’s current value and you’ll have your equity figure. For example, if your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 in equity. The value of your property is not going to be the same according to every lender meaning that the equity that you have that can be borrowed against varies from lender to lender.
It’s important to keep in mind that banks will not lend up 100% of the value of the property. Generally speaking, you can only lend up to 80% of the value of the property (LVR) without paying lenders mortgage insurance. In the above scenario, at 80% of $500,000, you can take a loan out of $400,000, so of your $200,000 in equity, you can borrow another $100,000.
For lawyers and certain specialists, many banks will allow for you to borrow up to 90% LVR and for doctors, there are banks that will allow for you to borrow up to 95% of the value of the property.
Many lenders offer online tools to help you estimate your equity. You can use a home equity mortgage calculator or a home finance calculator in Australia to understand your borrowing capacity. However, consider consulting with finance brokers who can provide personalised advice based on your specific situation for a more accurate assessment.
If you’re in Melbourne, you should seek advice from Melbourne mortgage brokers who are familiar with the local property market. Local home loan brokers in Melbourne can guide you through the process of accessing your Melbourne home equity in detail.
How To Use Equity To Buy Another Home
One of the most powerful ways to leverage your home equity is to buy investment property with a home equity loan. Using a home equity investment loan, you can purchase another property without having to save for a large cash deposit.
Here’s how it typically works:
- Determine your available equity and borrowing capacity.
- Apply for a home equity investment loan.
- Use the funds as a deposit on an investment property.
- Take out a separate mortgage for the remaining balance on the investment property.
This strategy can be an effective way to build your property portfolio, but carefully considering the risks and potential returns is crucial. Remember that you’re essentially using your primary residence as collateral, so ensure you can manage the additional debt responsibly.
How Do You Use Equity in Your Home To Renovate
Renovating your home can improve your living space and increase your property’s value. A home equity loan for renovations can provide the funds you need to tackle those home improvement projects you’ve been considering.
When using home equity financing for renovations, consider the following steps:
- Estimate the cost of your renovation project.
- Determine how much equity you can access.
- Apply for a home equity loan or line of credit.
- Use the funds to pay for your renovation costs.
One advantage of using a home equity loan for renovations is that you can borrow based on the projected value of your home after the improvements are completed. This is known as a home equity loan based on value after renovation.
Home Equity Loan vs Renovation Loan
The only real different between a renovation loan and a home equity loan is that renovation loans will be funded through stages (progress payments) and renovation loans also must have a fixed price building contract in order for a valuation be conducted that included what the future value of the property will be.
How the future equity can fund your renovations
If the renovations on your home are going to be conducted by a professional builder and there is a fixed price building contract (FPBC) you are not limited to the current value of your home when evaluating your equity position.
Banks will value your property as if the renovations were complete and calculate the LVR based on the renovations being completed.
For example, you have a property worth $1,200,000 and the loan amount is $800k, your LVR on that home is about 67%. If you wanted to borrow up to 80% of the value of the property for your $400k renovation project, you could only borrow $160k and would have to find the other $240k through savings, or not proceed with the renovations.
With a FPBC, the bank can value your home based on the completed value of the home at $1,600,000 and borrow the additional $400k
Options for first-time homebuyers
While this article focuses on leveraging existing home equity, it’s worth mentioning that there are programs available for those looking to enter the property market.
The First Home Buyer Scheme offers support to eligible first-time buyers, allowing them to purchase a home with a smaller deposit. Additionally, the First Home Owner Grant provides financial assistance to those buying or building their first home, subject to certain conditions and eligibility criteria.
These programs can be a stepping stone towards building home equity, which you can then leverage for renovations or investments in the future.
Choosing Your Home Equity Investment Options
Home equity financing offers a versatile and potentially cost-effective way to fund your renovations or invest in property. Whether you’re looking to update your current home or expand your property portfolio, tapping into your home’s equity could be the key to achieving your goals.
At Loanscope, we help Australian homeowners make the most of their home equity. Our experienced team can guide you through the process, help you understand your options and home equity loan interest rates and find the right home equity investment solution for your needs.
Q&A:
- What exactly is home equity financing?
Home equity financing lets you borrow against the value you’ve built in your home. It’s essentially the difference between your property’s market value and the balance left on your mortgage. - How do you calculate your home equity?
Subtract the remaining mortgage balance from your home’s current value. For instance, if your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. - Can you use home equity to buy another property?
Yes. By securing a home equity investment loan, you can use the funds as a deposit on a new property, allowing you to grow your portfolio without a large cash deposit. - Is home equity financing a good option for renovations?
Absolutely. A home equity loan can fund major renovations, and some lenders even let you borrow based on your home’s post-renovation value, offering added flexibility. - How does a renovation loan differ from a home equity loan?
Renovation loans release funds in stages to match construction phases, while home equity loans generally offer a lump sum upfront based on current or future property values.
