What is home equity and what are some ways to use it?

Over the life of your home loan, you should be slowly building up the equity in your home as you chip away at your outstanding mortgage, so long as your repayments cover the interest and principal. You can then use this equity in a number of different ways, which could help you get closer to achieving your financial goals.

Let’s take a deeper look at home equity and how you can use it.

What is equity?

In short, home equity refers to the proportion of your home that you own outright. It’s the difference between the current market value of your home and the amount you still owe your bank or lender.

How to calculate home equity

Working out your home equity is simple, so long as you have the right figures on hand. Let’s say your home is currently valued at $750,000 and you still owe the bank $350,000 toward your home loan. To calculate your equity, you would simply subtract the outstanding balance from the value of your home. In this case, you would minus $350,000 from $750,000 to leave you with $400,000 of home equity. 

What you can do with home equity?

There are different ways to use the equity you’ve built up in your property. But before you go tapping into your home equity, it’s important to reflect on your long-term goals and how your home equity can help you achieve them.

Here are just some of the options you have available to you.

Buy an investment property 

Saving money takes time and commitment. Especially if you’re already paying off your current home loan. But did you know that you can use the equity you build in your home to buy an investment property? 

That’s right. Rather than trying to scrape together every last dollar for a deposit, you can just continue to pay off your mortgage as usual. Once you’ve built up enough equity, you can then use it to fund the purchase of an investment property. 

Renovate your home

If forking out for another property isn’t part of the plan right now, you might decide to use your equity to renovate your home instead. Again, rather than saving up everything you need to cover the costs of the improvements, you can keep chipping away at your mortgage until you’ve got enough equity. 

You can then use your home equity to pay for labour, permits, materials and anything else you might need to complete your home renovations. 

Invest in shares or other investments

If you’re keen to diversify your investment portfolio, you might want to consider using your equity to invest in the share market or purchase other investments, like bonds or managed funds. It’s important to remember, investing comes with its own risks and especially when you use your equity to fund an investment. With this in mind, it’s important to consider the risks and seek tailored financial and tax advice to decide if this strategy is right for you. 

Fund a business

You can use the funds as capital to start a new business or expand an existing one. Rather than taking out a separate business loan to bankroll your existing business or start a new one, you may be able to use the equity in your home instead. 

Buy a new car

Some people choose to put their equity towards large purchases, like buying a new car, boat or caravan. Instead of taking out a personal loan to fund a large purchase, home loans often feature lower interest rates, so you can save on interest repayments by using your equity.

Take a holiday

You could even use your equity to fund your dream holiday or other leisure activities that you might not otherwise be able to afford.

Fund education

For education related expenses, such as private school or covering the cost of university education, you could consider using the equity in your property to cover these expenses. 

Debt consolidation

Some people choose to use their equity for debt consolidation purposes. If you have a number of other high-interest debts, like credit card debts and personal loans, you may be able to use your equity to roll this debt into your existing home loan. Usually, home loan interest rates are lower than other loans and debts, so you can take advantage of interest savings. Plus, it’s often easier to keep track of a single debt rather than multiple different debts, each with its own due date and payment amount.

How to use equity in your home?

When it comes to accessing your home equity, you’ll need to take out a home equity loan. A home equity loan refers to any type of loan that allows you to borrow against the equity in your home. Here’s how it works.

How does an equity loan work?

There are several common home equity loans in Australia, including a line of credit, lump sum or home loan top up. 

A line of credit is similar to a credit card. With this option you can access funds up to a predetermined amount. You’ll only have to pay interest on the portion of the funds you use, rather than the full limit.

With a lump sum, you can use your home equity to borrow a large sum of money. Unlike a line of credit, you’ll receive the amount you’re borrowing in full, so you’ll have to pay interest on the total amount that you’ve borrowed.

A home loan top up allows you to borrow against the equity in your home to top up your existing home loan. 

Growing your home equity can open the door to a range of different opportunities. From funding home renovations to purchasing investment properties or diversifying your investment portfolio, there are a range of different ways to use your home equity. It’s up to you to determine which is most appropriate for you. 

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍