04 Mar How To Make Your Home Equity Work For You
While you may think of your home loan as a never-ending series of repayments, with each mortgage repayment you make, you’re building up equity in your home. And if property prices are increasing in your area, you may already have built up enough equity to use towards buying an investment property, renovating your existing home, or consolidating and clearing your high interest debt. Here’s more on what equity is and how you can use it to your benefit.
What is equity
The simplest definition of equity is this: equity is the difference between what you owe on your mortgage and what your home is currently worth. For example, if the current value of your home is $800,000 and you still owe $600,000 on your home loan, then effectively you have $200,000 in equity.
There are two ways to build up equity in your home:
- Your home’s value increases because of market changes or you make home improvements.
- You pay off your home loan over time.
Depending on your financial situation and the type of home loan you have, you may be able to access your home’s equity without selling your home to finance other things, like property investment, home renovation, or debt consolidation.
Using equity for property investment
Buying an investment property is one of the most common ways that borrowers use their equity. By accessing the equity in an existing property, you may not need to save a big deposit or sell your home in order to add to your property portfolio.
When refinancing your mortgage to tap into the equity in your home to buy an investment property, your lender will require a valuation of your property to determine its market value, and that valuation is then used to calculate your total equity.
But that’s not all that lenders will look at. Along with the market value of your home, lenders will also need to factor in how much you still owe on your existing mortgage, how property in your area is performing, how much you want to borrow to buy an investment property, and your ability to service more than one mortgage.
Your income, living expenses and other important factors are also considered and most lenders will typically only release up to 80 per cent of your home’s equity for you to use to buy an investment property.
Using equity for home renovation or improvements
Home improvements and home renovations are an excellent way to add value to your home and build up more equity. Things like installing a new deck, remodelling your kitchen, or adding a second bathroom can improve both your home and your lifestyle.
Because your home loan interest rate is usually much lower than that of a personal loan or credit card, it makes good financial sense to access the equity in your home to pay for home improvements or home renovations.
To determine how much you may be able to borrow against your home’s equity to pay for home renovations or home improvements, work with the experienced Mortgage Advisers at Max Mortgages. Or for minor changes or repairs to your home, the Personal Lending Team at Max Loans may be able to help with a home improvement loan to finance a smaller project.
Using equity to consolidate debt
Many people struggle to pay down high interest debt. Credit card debt in particular can quickly stack up if only the minimum payment amount is being paid each month. On top of this, missed payments or late payments can mean added charges and fees, and even a black mark against a credit score.
Getting rid of high interest debt is key to staying on track financially. And while one way to do this is to pay down high interest debt over the term of a loan, another is to use the equity in your home to consolidate your debt.
Depending on the size of your debt, your financial situation, and your personal needs, you may be able to roll all of your existing high interest debt into your home loan by tapping into your home’s equity and increasing your home loan, or through a separate debt consolidation loan. Either way, consolidating your debt into a much lower interest rate and more manageable repayment terms could help you get your finances back under control.
Making your home equity work
Whether you’re looking for ways to add value to your home with a home renovation or home improvement project; or you’d like to buy a rental property, holiday home or investment property; or you need to consolidate and clear your debt, get advice from the team of experienced Mortgage Advisers at Max Mortgages. We’ll work with you to determine the right finance solution for your situation, and help you get the right home loan NZ wide to suit your needs!Contact a Mortgage Adviser
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