If you’ve owned a property for a while and paid down a portion of your loan, you might wonder how much equity it currently holds.
Understanding your property’s current equity is crucial. It enables you to budget and estimate whether you have enough equity you can leverage to renovate, invest in a new property, or refinance an outstanding debt.
Figuring out how much equity you have can be confusing. Typically, banks and lenders will not allow you access to 100% of the property’s equity and will limit how much you can use. This is determined through multiple factors, which we will breakdown and explain in this post.
Home Equity: In a Nutshell
When you’ve successfully bought your first home, you eventually accumulate a significant asset in the form of equity. We’ve discussed this in-depth in another post. But in short, it is the portion of your property you fully own.
As you repay the home loan used to purchase the property and its value appreciates, its equity will grow.
Why should I understand how to access home equity?
Using your built-up equity can be very useful and convenient, especially if you want to purchase a second property but don’t have enough savings to make a deposit.
It also works for homeowners who want to reinvest in their current home and need additional funds to renovate or expand the property.
Securing a Separate Home Loan
In an Equity Home Loan, you can use your current home’s value (equity) as a deposit to apply for another home loan used to purchase another property.
This is an appealing method for those investing in real estate because you use the property you already have to grow your portfolio.
How to Calculate Home Equity
Calculating home equity is pretty straightforward. You just need to take the property’s market value and then subtract your current loan balance from that amount.
Let’s break down the process step-by-step.
1. Identifying Property Value
One way to identify the current market value is to check online estimators or the selling prices of local properties. You may also speak with a professional property valuer to determine your home’s current market value.
Speak with our senior mortgage brokers today, and we’ll provide you with an estimated value of your property.
2. Determining the Remaining Loan Balance
Take the amount you still owe on your outstanding home loan. If available, you can find this on your latest mortgage statement or internet banking portal. Alternatively, you can also contact your lender directly to check your remaining balance.
3. Calculate Your Home Equity
Now that you have the property’s current value and remaining loan balance, you can calculate your home equity.
To do this, simply subtract the outstanding mortgage balance from the property’s current market value. The difference will be your estimated home equity.
For example, say your property is currently worth $970,000 in the market, and its remaining loan balance is $300,000. Subtracting $300,000 from $970,000, you have $670,000 in home equity.
4. Calculate How Much Equity You Can Access
Despite having $670,000 as home equity (as per our example), the lender won’t let you access 100% of the amount as a loan deposit.
Note that home loans have a pre-determined allowable loan-to-value ratio (LVR) that varies between lenders and the type of loan. This LVR will determine how much equity you can access.
- Determine the maximum LVR: Talk to our senior mortgage brokers to determine the maximum LVR you can borrow for home equity loans. It’s typically around 80% and can go up to 90%, depending on your situation.
- Calculate how much equity you can access: Multiply your property value by the LVR percentage. Then, subtract your current loan balance from the product.
For example,
$970,000 x 80% LVR = $776,000
Current loan balance = $300,000
Accessible Equity: $776,000 – $300,000 = $476,000
The calculation we have covered is to determine the maximum amount of equity that can be accessed. How much equity and LVR the bank can actually lend you will depend on several things, such as your credit score, proof of income, and how well you handle your finances.
Our senior mortgage brokers will work with you through this process to ensure you get the best LVR and loan rates that work for you.
Talk to our senior mortgage brokers at 1300 030 388 or enquire now, and we’ll let you know how you can leverage your home equity to invest or purchase a new property.
Factors To Consider When Using Home Equity
Here are a few key factors to remember when applying for a home equity home loan:
Loan-Related Fees
There are fees associated with borrowing against home equity. This includes application fees, legal fees, and property valuation fees.
You may also be required to pay Lenders’ Mortgage Insurance (LMI) if you borrow more than 80% of the property’s value.
Repayment Affordability
Before accessing your home equity as a home loan deposit, we recommend assessing whether you have the capacity to repay the loan regularly.
Our senior mortgage brokers will discuss your financial situation with you and recommend hand-picked home loan solutions from 40+ lenders in our panel. We’ll determine which mortgages are compatible with your income and financial goals so you can pay them off conveniently and regularly without breaking the bank.
We also account for potential interest rate changes to ensure that you can handle repayments easily.
Seeking Professional Guidance
Having a mortgage broker by your side is highly recommended, as you’re more likely to find a home loan deal that best suits your needs. At Mortgage Pros, we have an extensive history of working in senior banking positions at major lenders and credit institutions.
We know what banks look for in home loan applications and can help you understand each home loan package’s risks, benefits, and alternatives and how much equity you can access.
Key Takeaways
Utilising home equity is a convenient and smart way to leverage your built-up value and get finance for other projects and investments.
Estimating home equity involves determining your property’s current value and where you stand on your outstanding home loan.
Using your home equity as a loan deposit means putting your home as loan security/collateral. Doing so increases your home loan deposit and may help you skip LMI fees altogether.
Talk to our senior mortgage brokers at Mortgage Pros, and we’ll walk you through different home loan solutions that best suit your needs.
Contact us at 1300 030 388 or enquire now to learn more.
