How to build equity in your home

As a homeowner, it's likely you might have other real estate-related goals on your agenda. From investing in a rental property through self managed super funds, becoming debt free faster or providing for your retirement, everybody is always thinking ahead for their financial future.

One way many homeowners prepare themselves financially for the future is by building up equity in their properties.

What does it mean to build up equity in your property?

The equity in your home is the difference between its market value and your remaining home loan balance. To put it simply, this is the value of what you currently own in your home.

For example, the market value of your home is $350,000 and you still owe $200,000. When you subtract the loan balance from your property value, you have equity of $150,000.

Your equity tends to build overtime as you continue paying off your loan and as your property value increases.

So, if your $350,000 property increases in value by 12% in a year you’ll have an extra $42,000 in equity.

Plus the repayments made over the course of the loan can significantly increase your equity. Use our equity calculator to help you find out how much usable equity you have.

When you build up equity, it means you are increasing this value.

There are a variety of ways to do this.

One example, is to purchase a property in a suburb with growing property value. Location of a property can often lead to quicker gains in equity as the value of the area rises with demand.

Ways to build equity quickly

Refinance to a) a shorter loan term or b) cheaper rate, or both

While refinancing your mortgage may seem like a tough task, with the help of our team at loans.com.au it doesn’t have to be.

Refinancing is the process of moving your home loan to a different lender or a different loan that better suits you. There are a number of reasons for doing this, but the number one reason is to save money on your loan.

At loans.com.au , refinancing is as simple as applying online in under 2 minutes, chatting to a lending specialist then uploading your documents in the onTrack app. After this, you’ll sign your loan documentation, we’ll pay your existing lender then you’ll settle!

By having a shorter loan term with a cheaper rate, you will pay much less interest over the life of the loan putting more cash into your pocket.

Make additional repayments

The equity in your home loan grows as you make each repayment, so it makes sense to increase this amount to build up a sizeable amount in your loan.

If you can afford to add a few extra dollars to your regular repayments, you can also reduce the term of your loan and save the amount of interest you pay.

Additionally, making repayments more frequently such as fortnightly, is an option loans.com.au offers to allow you to pay off the loan faster.

Paying more regularly means reducing the principal quicker, and building that equity value.

Also, adding an offset sub-account can help increase equity.

An offset sub-account operates like a savings account that’s linked to your loan. Instead of being paid interest on your offset account, the amount of interest you pay on your loan is reduced. This can help you pay your home off sooner, and build equity while you’re at it.

Increase the value of your property through renovations, home improvements

Your equity is linked to the value of your home. So increasing how much your home is worth will naturally increase your overall equity. Adding some valuable renovations to your home could do wonders for your overarching equity value.

There are many ways to add value to a property. Here’s a list of improvements many people consider when looking to renovate:

• Painting

• Landscaping

• Bathroom renovation

• Kitchen renovation

• Floor replacement

• Roof replacement

• Additional storage

These improvements will depend on your situation. If you are looking to build equity in your property and make money out of it, it’s important you don’t spend more than you can could potentially recoup should you decide to sell.

This concept is called overcapitalising on your property.

Get another bank valuation

A property valuation is an estimate of the value of a property.

However this valuation must be done by an independent or bank-approved appraiser.

Take note that a property valuation and the market valuation of the property are two different things. A market valuation or appraisal is an estimate of the current price of the property in the market, usually done by a real estate agent. The value of the house is based on recent sales and market trends.

On the other hand, a property valuation is performed by a certified valuer where they consider the home’s value for a longer term. It is generally more conservative and is used by financial institutions to assess the value of the property to calculate how much money they can lend to you.

There are certain guidelines and policies valuers follow when valuing a property. These guidelines are set by the Australian Prudential Regulation Authority (APRA). Qualified property valuers determine the value of your property by assessing numerous factors, such as:

• size and shape of the property

• topography of the land

• zoning

• potential for development

• location

• number of rooms

• age and condition of the house

• fixtures and fittings

• design and layout, and

• other special features of the house

How long does it take to build equity?

The goal when building equity is for the value of your home to increase.

Strategies such as renovations, lump sum payments and refinancing, can create equity in your property faster.

However the goal for many investors and home owners is to purchase a property in a suburb or area that will help the property appreciate in value.

Location of a property is a key to capital growth, and will increase equity without investing further into the property with expensive renovations and improvements.

What can you use your home equity for?

When you build up equity in your home, there are many ways you can use it.

Refinance your current home

If you are refinancing your current home loan, your equity could be used for a better interest rate. If you are looking to refinance and have your equity factored in, we offer some of the most competitive rates if you refinance to a loans.com.au home loan.

New house deposit

The equity you have in your property can be used as a deposit to purchase a new property prior to the sale of your existing property. This is done by using the equity for things like purchasing a new or bigger home. This is known as a bridging loan.

A deposit for an investment property

A common strategy for homeowners looking to break into the investment property market is using the equity in your home as a deposit for an investment property loan.

You can leverage the equity in your home to cover the deposit on a new property, using your existing property as collateral. It’s great to make the first step to enter the property market because once you’re in, using equity is generally much easier than saving for another deposit. Find out more about using equity to buy another home. 

To get started on seeing how your equity can start doing the heavy lifting, call 1300 796 948 to chat to one of our friendly lending specialists today.

Ready to start saving on your home loan?

Find out in under 2 minutes if you qualify for one of our low rate home loans.

Do I Qualify?