For those with an existing home loan, it can feel like the money you pay off disappears into a black hole, never to be seen again.
Sure, you can see your balance going down slowly each month but 30 years is a long time, and what if your circumstances change?
Over those 30 years you may need to make some big purchases like a holiday, car or even pay for school fees.
Well, most customers don’t realise that they have untapped funds stored up on their home that can be used. It’s called equity. Equity is the difference between what you owe on your home loan and the market value of the property linked to that loan.
For example, if you owe $200,000 on your home loan and the bank values your home at $500,000, you have $300,000 equity.
Now not all of that equity will be available to take out. It’s still up to the lender to approve how much you can use based on your age, income and other debts.
There are a few ways you can build equity in your home.
- You can make extra repayments, so that the amount owing on your loan is lower
- Your house value goes up. This can be through normal market fluctuations or through improvements and renovations you make.
- Open an offset account. Any money stored in your offset account reduces interest you are charged each month, meaning you are growing your equity at a faster rate.
So how do you actually use the equity?
You can spend it on anything, really. You can:
- take a holiday
- buy a car
- pay for school fees
- buy an investment property (or a deposit for one)
It’s important to remember that using the equity in your home is an important financial decision. The amount you owe your bank will increase which may lead to higher repayments.
A good option is to talk to one of our mortgage broker specialists to fully assess your financial position and lay out all your options before making such a big decision.