How much equity can I use?
When you first buy a home, you typically have to put down a deposit and borrow the rest of the amount you need to make the purchase. Lenders usually lend up to 80% of the property value (this is to ensure you avoid paying Lender’s Mortgage Insurance).
A similar calculation applies when it comes to equity. If your property has appreciated in value since you bought it, you could access up to 80% of its current market value minus what you now owe on your mortgage. This is called usable equity and it could help you in a number of ways.
You could access the usable equity you’ve accumulated and put it towards a deposit for your next home.
You could also use it to renovate your home, which in turn could improve market value.
Similarly, you could access your usable equity to invest in property, allowing you to potentially build wealth through capital gains and rental income.
What is negative equity?
Typically caused by falling house prices, negative equity is when your property is worth less than what you owe on your mortgage.
Let’s say for instance you bought your home for $400,000 with a home loan of $350,000 and the property is now worth $300,000. You would be in negative equity to the value of $50,000.
On the other hand, if you bought your home for $400,000 with a home loan of $350,000 and the property is now worth $450,000, you would instead have positive equity to the value of $100,000.
In some cases, your property could have appreciated a small amount leaving you with some equity, but your lender may only lend you up to 80% of the property’s value. This could mean you don’t have any usable equity in your home.
How can you avoid negative equity?
Due to changing market conditions, there’s never a guarantee that you will avoid having negative equity in your home. However, there are a few proactive steps that could help.
Boost regular repayments and make one-off contributions
Increasing your repayment amount can be a good way to build up equity quickly. Try to settle on an increase that will make a difference to your loan balance but won’t compromise your monthly budget. Even small regular amounts will reduce the amount of overall interest you pay and term of the loan. Making additional one-off contributions such as annual bonuses and tax refunds could also be an effective way to bring down your loan balance and build up equity. Even small regular amounts will reduce the term of the loan.
Increase the value of your home
Other than paying your loan principal down, making your home more valuable is one of the most direct ways of increasing your equity. Renovation is sometimes an effective way to improve your property’s value. Savvy renovations might involve updating a kitchen, adding a second bathroom or building a parents’ retreat.
How do you access usable equity?
If you are in the fortunate position to have built up some usable equity and want to access it, you first need to have your property valued by your lender. This is called a bank valuation and will usually be lower than the market value a real estate agent might give your property.
Once your property has been valued, your lender will be able to give you a clearer picture of the usable equity in your home. From there, the next steps are up to you.
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