Easy Equity: How To Make Your Home Loan Work Harder For You

KEY TAKEAWAYS

• An equity is the amount already paid of the current value of the land. 
• While the banks lend only usable equity, it can be utilized as a deposit for rental property. 
• Equity can also be accessed to renovate or extend your property or even invest it in a bond or shares. 

Do you have a home loan? Millions of families are currently on variable or fixed rate home loans, representing billions of dollars of debt. For many people, borrowing money is the only way to break into the housing market. 

And as the ‘American Dream’ and the goal for families in many other Western countries, involves house ownership, it’s not surprising why. For most of us, our mortgage is guaranteed to be our most significant expense.

But what if the home loan could work harder for you, rather than you having to work hard for it? This helpful article will discuss house loan equity and tips to leverage the mortgage to benefit you. Read on to learn more. 

What is Equity?

To begin with, we’ll need to explain what equity is within the context of home loans. Put simply, it is the difference between the current market value of the land and how much you’ve been able to pay off, thus how much of that value you actually own. 

For instance, if the house is worth $900,000 and you still owe $500,000, the equity is $400,000. It represents your stake in the property and how much you own excluding the remaining mortgage amount. 

THINGS TO CONSIDER
As long as your home does not require extra repairs or damages, it will hold its correct market value. Maintenance is therefore necessary while you continue paying on time and the equity will naturally build over time. 

Useable Equity

Above, we’ve discussed how to calculate the total equity of land. However, banks will only lend around 80% of the value minus the debt owed. This is called usable equity. 

This is to protect the bank in case house values plunge. In the example above, the usable equity would be $320,000. 

The great thing about having some usable value in your house is that to use it to leverage other financial decisions. Let’s explore how to utilize the property loan strategically.

Use Your Equity as a Deposit on an Investment Property

Using your equity as a deposit is a common practice. This way is good to avoid saving up cash for a deposit on a rental property. It can be accessed in your principal place of residence (PPOR) as a deposit for saleable land. 

With a decent amount of usable value,  the mortgage for your investment property is modest, saving money on repayments and interests throughout the loan.

There are several advantages to owning saleable land, which we’ll now delve into. For one, it’s a passive income stream – money generated for no labor. 

The tenants pay you rent, minus the real estate manager fees and other expenses associated with owning a house, such as rates, maintenance, and repairs, and then the result is profit. This profit can be used to pay the rental land’s mortgage, and hopefully, there will be some leftovers for future 

Another benefit is that it can be leveraged for rental expenses to reduce overall taxable income and negatively gear a property if it’s not generating a profit.

Access Equity to Renovate or Extend Your PPOR

If you’ve built up some equity in the PPOR, it can be accessed for the usable one to renovate or extend the estate. For instance, if the kitchen and bathroom need a makeover, it could use the funds for a major renovation, creating brand-new rooms with all the features required. 

Or, if there’s a room in the backyard or it’s feasible to go up, it could be extended out or up, creating extra rooms and more space. This is an excellent option for a growing family, to avoid buying a larger house by extending the current one. 

The graph below shows the home equity market lending size for the upcoming years. It is a clear indication that despite the looming fear of inflation, people plan to invest in properties in different ways. 

Utilize Your Equity for Investments 

Try not to use your equity to invest in land or renovate the PPOR – when it can be utilized to invest in other avenues. Investing in bonds, shares, funds, and other financial streams is an excellent way to generate passive income or returns. 

For instance, shares often pay dividends to shareholders or sell shares once they’ve increased in value. There are some viable wealth-creation strategies that investing can unlock.

However, with this tip comes a word of caution. These forms of banking carry more risk than buying an investment property. All finances come with inherent risk, so this choice will depend on the risk appetite and if it is comfortable losing some of the profits. 

It is worth seeking independent financial advice if you’re looking to use the house’s equity to invest. A qualified and licensed financial advisor can provide expert advice tailored to your unique situation and financial position. 

A Savvy Summary

This helpful article has made understanding equity easier and shared three viable strategies to make home loans work harder for you. Investing in property, renovating or extending a house, or utilize it for other investments is a tough task. What you choose will depend on your circumstances, and remember, it is well worth seeking independent financial advice from a qualified professional. 

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