Home equity: Swipe right on your cash potential
As you own more and more of your property, you open up more opportunity.
What is home equity?
Very simply, home equity is the amount of the home that you own. It's the value of your property minus the balance remaining on your home loan. Most people with start of owning between 10-20% of the property, thanks to that deposit you saved!
How much equity do I have in my home?
You should easily be able to work out the equity you have in your home. Here's an example:
- Your property is valued at $1,000,000.
- You have $700,000 remaining on your home loan.
- The property value minus debt = $300,000 in equity
If you need it, you can use this simple calculator to estimate your equity. Just enter the following information:
- An estimate of what your property is currently worth.
- How much of your home loan is left to repay.
Now, equity calculations are always hypothetical to some degree. The value of your property changes over time and you can't really know what it's worth until you sell it.
Over time, your equity should grow as you pay off your debt. The more you pay off your loan, the more of the house you own!
How changing property values affect your home equity
Apart from paying down the loan, the other factor affecting your home equity is the property's value. In a market where property prices are rising, the better your equity in the home becomes. But again, you can't always know how much your property is worth and so won't always have a clear idea of what your exact equity is.
Our expert says
"When estimating your equity, it is important to consider the current property value rather than the price you paid for it. If you bought a home 5 years ago for $650,000, in a rising property market, it could now be worth $800,000.
And if you need an accurate picture of your remaining debt, check your most recent home loan statement or log onto your lender's banking platform to check your loan account."
How can I use the equity in my home?
Property owners can borrow against their equity to fund things like investment property purchases, renovations, retirement costs and more.
There are several finance options property owners can use to unlock the equity in their homes, ranging from line of credit loans to home loan top-ups and, for older Australians, reverse mortgages.
- Line of credit loan. A line of credit loan allows home owners to borrow money against the equity in their property. The lender approves a certain amount of money based on your equity and charges you interest based only on the money you actually spend. It's a flexible way of using some of your home equity. But keep in mind that interest rates on these loans are higher than regular mortgages. The more you spend, the less equity you will have.
- Refinance. If you're currently paying off a mortgage, it's possible to switch to a new home loan with a new lender. This is called refinancing your home loan. You can do this to switch to a cheaper home loan with a lower interest rate. But when you switch, you can also use your equity to borrow slightly more with the new home loan.
- Home loan top-up. Instead of refinancing, you can stick with your existing loan and lender but apply for a home loan top-up. This means keeping the current loan but extending your borrowing limit slightly further.
- Reverse mortgage. Australian home owners who are aged 60 or older can borrow some of their equity using a reverse mortgage. Interest is charged on what you borrow, and you repay the debt when you sell the property or die. This option can be used to fund your retirement costs, supplement your income or for anything else you need.
Need professional guidance on unlocking your equity? Chat to a broker.
What can I use home equity for?
Equity is your wealth. In theory, you can spend it on whatever you want. But sometimes a lender may restrict what you can spend the money on, depending on the type of loan you get.
You can use your home equity for the following:
- Renovations. Big home renovations are expensive but are a great way to improve and add value to your home. You can use your equity to effectively build more equity.
- Financing major purchases. You can pay for a holiday or a car through your equity.
- Investing in property. With enough equity, you could cover the deposit on a second property and then rent it out.
Finder survey: Why do people refinance their home loan?
| Response | Female | Male |
|---|---|---|
| A better interest rate | 5.08% | 4.24% |
| Lower fees | 2.2% | 1.73% |
| To reset the loan term | 1.69% | 0.96% |
| A cashback or other incentive offer | 1.19% | 1.35% |
| Better/more features | 0.51% | 1.35% |
| Better overall cost | 1.19% | 0.58% |
| Other | 0.17% | 0.96% |
| To move to a different brand | 0.68% | |
| None of the above | 0.17% |
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
Are there any risks that come with using your equity?
Borrowing your equity reduces how much of your home you own outright. If you borrow too much, you risk going backwards on your home loan repayments and/or taking a longer amount of time to pay it off.
Lenders limit how much equity you can access, which gives you some protection, as you cannot take out 100% of the equity in your home. Usually, the bank will only allow 80% of this amount, maybe up to 90% if your occupation will allow a LMI waiver. But any borrower looking to cash out some of their equity should know that borrowing your equity adds to your debt. You will have to repay the equity, plus interest, along with your normal mortgage repayments.
If you don't have much equity and the property market is in a downward cycle (prices are falling), you might also have less equity available than you think – and borrowing some of it risks tipping you into negative equity.
How can I increase the equity in my home?
Home equity increases in several ways. Growth can be passive (if your property value grows over time in a rising market), but you may be able to add value to your property through renovation.
- Repayments. As you pay off your home loan, you are adding to your equity. If you started a home loan with a 20% deposit, you'd have a loan to value ratio of 80%. After 5 years of diligently repaying your loan, you could be at 70% LVR and 30% equity. Keep in mind this only works if you have been making principal and interest loan repayments. You can build your equity faster by making extra repayments.
- Capital growth. Over time, property prices in Australia tend to grow. This is called capital growth. According to CoreLogic's Home Value Index, the median Sydney property value in September 2020 was $859,943. In March this year (2024), the Sydney median stood at $1,139,375. That's $279,432 in equity that a median property would have gained over less than 4 years. (For context, the 4 years before that saw a median price increase of $74,943.) Of course, there are exceptions, and prices can fall over time too, so passive equity growth through capital growth is never guaranteed.
- Renovations. Property owners can increase the value of their properties through renovation. Adding an extra room to a house, redoing a kitchen or bathroom or even just a fresh coat of paint can make your property more appealing to buyers, increasing its value
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