Many of us have seen our home’s value grow significantly over the last few years. This could mean that your equity is now large enough to put to a new use. So, whether you’re looking to renovate, invest in property or splurge on the holiday of a lifetime, the equity you have in your home can open up exciting possibilities.
Let’s look at ways to release it and some important things you need to keep in mind.
Calculating your usable home equity
Home equity is the difference between your property’s current market value and the amount you still owe. To keep a financial buffer in place that helps protect your home, most lenders will only let you access 80% of your equity. Say your home is currently valued at $800,000 with $200,000 still owing on the mortgage. Your equity is $600,000 but lenders will generally only allow you to access up to $440,000.
As with any loan, when deciding how much equity to release, lenders will look at your income, expenses and all your debts as well as the value of your home. If you’re using your equity for an investment property, then the amount of rent and overheads for that property are also taken into consideration.
Depending on your loan and lender, your equity could be released as a drawdown or redraw facility, a line of credit loan or via an offset account on your existing mortgage. And if your lender won’t approve an equity loan, a mortgage with a second lender may be a possibility. All these options come with different interest rates and conditions, so it’s a good idea to take the time to assess which suit your plans and circumstances, including if restructuring your mortgage is necessary.
Choosing what to do with your equity
Once you know how much equity you can access, it’s time to choose what to do with it. You can build up your asset through renovations or look to invest the money in either shares or an investment property. Reviewing and accessing your equity could also provide you with opportunities to explore, for example consolidating your debts or buying a new car, realising a passion project like that extended road trip or offering a source of income during a career break.
Whatever you decide to do with your equity, you’ll need to show the bank you can afford the repayments on the full loan amount, which in the case of an investment property, will include both the original and new mortgages.
Funding an investment property
When buying an investment property, lenders often allow up to four times the amount of your usable equity. So, if we look to our previous example, the usable equity of $440,000 means you could, in theory, spend up to approximately $1,700,000 on a property, inclusive of stamp duty, legal fees and other costs.
However, this is subject to you demonstrating you can afford the repayments on both mortgages. Lender calculators can give you a rough idea of what your investment repayments would be.
Weighing up the risks
While releasing equity in your home frees up capital, it does mean you are increasing the size of your loan and can carry risks, particularly when reinvesting. It’s also important to note that your equity does also depend on the value of your property and property values do fluctuate and can decline significantly. One of the main dangers is extending your financial position to a point where you can no longer service the monthly repayments. This would put any new investment, and even your home, at risk of repossession by the lender.
The current talk of interest rate rises makes it especially important to assess the amount of equity release you can realistically afford going forward. And please remember that all loan application decisions are recorded on your credit file and influence your credit rating. It’s another reason to discuss your options and work out exactly what you are likely to be approved for before applying for any equity release.
To find out how much equity you can realistically release and discuss your plans, please get in touch on (02) 8277 4605. We can work out a strategy to help you achieve your goals.
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