What is Equity?

• Your home is one of the few financial assets that has the potential to appreciate in value when you start paying off what you borrowed for it.
• The equity in your property is the difference between the current market value and the amount you owe on your mortgage.
• Building equity in your home is important, as it allows you to:
  • Borrow against it when you need it
  • Build wealth over time when the value of the property increases
  • Earn a profit when you sell your home

Equity Release

• An equity release or a top-up loan is an additional loan on top of your current mortgage. The amount you can borrow varies depending on the lender but is generally a percentage of your home’s appraised value, less any outstanding home loan balance.
• How does it work?
  • Find a lender that will accept your stated intentions for the equity release.
  • Order a property valuation to check how much can be increased on your home loan and whether Lenders Mortgage Insurance (LMI) is applicable or not.
  • Apply for the increase and, once approved, your equity release will be transferred to you within 2-3 working days.
• How do I apply for it?
  • Apply on a separate application with your lender.
  • Provide your last two payslips, a group certificate, and evidence for the purpose of releasing equity (if requested by the bank).
• What evidence do I need if I’m releasing more than $10,000?
  • If buying a new property: A letter from your conveyancer confirming you’re searching for a property or a copy of the contract of sale when a property is found.
  • For debt consolidation: The last three months’ bank statements showing regular payments for each debt.
  • For renovation and construction: Building contracts, a copy of the quotes and specifications from the contractors.
  • For shares and other investments: A letter or a copy of a plan from your financial planner.

Golden Tips

• Declare all of your liabilities because non-disclosure of your debts can lead to a direct decline of your application.
• Equity release is cheaper than taking out a personal or car loan, as home loan rates are lower.
• Until you actually draw down the funds to use, you will not pay interest on your loan increase.
• Remember that it is a loan, so check your financial position and ensure that you will be able to afford the repayments.
• Determine the precise amount of funds that you require, to avoid borrowing more than you need and not being able to pay it back.
• Refrain from regularly borrowing more against your home loan.

Equity Release Loan vs. Loan Increase

• Both allow you to borrow against the equity you have in your property.
• With equity release loans, you have to apply for a completely new home loan facility with its own features and interest rate.
• With a top-up loan, you simply borrow more funds on your current home loan and add that amount to the existing loan amount, so the process is a lot quicker.

How to Calculate the Equity in Your Home?

• You have equity in your home when the home’s value is greater than the amount you owe on the loan.
• Banks usually calculate the usable equity in your home as 80% of the property value, minus the amount you owe on your mortgage.
• For example, if the current value of your home is $850,000 and the balance on your mortgage is $300,000, most banks would allow you to use $380,000 of equity.
• Some lenders might let you borrow more than 80% of the current value, but you would have to pay Lenders Mortgage Insurance (LMI).

How do I access the equity in my home?

• To access your home equity, you must refinance your current home loan.
• This would involve taking out a new home loan for an amount greater than your existing loan and using the extra money to access your equity.
• The most common home equity loans are cash-out loans and using your equity in your current home to purchase another property.
• You can also use a line of credit or reverse mortgage to access your equity.
• A reverse mortgage and line of credit are a way to borrow money from your home. You can use the money for things like fixing your house or buying a new one.
• A line of credit is accessible to anyone with some equity in their home, but for a reverse mortgage, you first have to be at least 62 years old and fully own your home.
• The bank will give you a loan, and then you will pay that loan back over time with interest. However, these products are more expensive and should only be considered a last resort.
• Your home equity loan may be subject to equity release restrictions, also known as cash-out restrictions, which most banks have.
• The funds released can then be used for any worthwhile purpose, including renovating your home, investing in property, or consolidating debts.

Caution

• The equity in your home can either increase or decrease.
• Your home equity can increase if you make timely repayments on your mortgage or if the price of your property increases in the market.
• Similarly, it can decrease if you refinance and release some of your equity or if the value of your property decreases.
• When it comes to taking a home equity loan, you are choosing to decrease the equity you have built up in your home.
• Be certain you are making a wise investment with the released equity.
• Minimising unnecessary spending, making optimum use of the released equity, and aiming to pay off your home loan as soon as possible should be your goal.

Tips to Build Property Value

• Buy Property in Emerging Suburbs
  • Properties in these suburbs have the potential to grow in value and you can buy them at affordable prices now.
  • Emerging suburbs are characterised by infrastructure development, employment growth, and people moving towards those suburbs.
  • If you buy property in an emerging suburb, the value of your home will probably increase over the next five years, helping you build equity.
• Renovate Existing Property
  • You can increase the equity of your home through renovations and improvements that increase the property value.
  • Upgrading the kitchen, landscaping, or number of rooms can increase your equity.
  • Routine maintenance and inspection of your home can also help maintain the value of the property.
• Wait for Values to Rise
  • Investing in property is a long-term strategy, as prices usually appreciate in value a few years down the line.
  • For owner-occupiers, the value of a home might increase if it’s in the right location and they live in it for a few years.
  • As property is one of the few assets that increases in value as you pay down debts attached to it, you can build up the equity in your home just by staying in it for more than five years.
• Get Another Bank Valuation
  • If you need to access equity, you can revalue your property if you think the value has gone up.
  • Different banks have their own valuation methods. If the existing lender gives a valuation lower than expected, you can ask for a valuation from a different bank.
• Save a Larger Deposit
  • By saving a larger home deposit, you’re building equity in your home from the start.
  • In most cases, a larger deposit means you don’t need to borrow as much from the bank.
  • If your deposit is 20% or more of the property value, you do not have to pay LMI, potentially saving you thousands of dollars.

Tips to Reduce Mortgage

• Use an Offset Account
  • An offset account helps you reduce the amount of interest you pay. The more money you have in your offset, the less interest you pay.
  • Since the home loan interest is calculated based on the balance of your loan, the money in your offset account helps reduce the loan balance.
• Make Timely Repayments
  • Making repayments on your home loan also helps build equity.
  • By making regular and timely repayments as they’re due, you’re slowly chipping away the balance of your mortgage, accumulating equity that you can use whenever required.
  • Making timely repayments also establishes positive credit behaviour.
• Make Extra Repayments
  • If possible, you can even make extra or lump-sum repayments.
  • If you have received a tax refund, a bonus, or a commission, you can use this money to increase your repayment amount.
  • By repaying more than the required amount, you’re paying off your home loan sooner.
  • Some lenders might charge a penalty for lump-sum or extra repayments. It’s best to check with your lender or mortgage broker before moving ahead.
• Switch to Fortnightly Repayments
  • By increasing the frequency of your repayments from monthly to fortnightly, you’re adding the equivalent of an extra monthly repayment each year.
  • For example, Tina has a loan balance of $800,000. Her interest rate is 3% and she’s making a monthly repayment of $2,500.
  • Repayment frequency
    • Monthly
    • Fortnightly
  • Required repayment amount
    • $2500 x 12
    • $1250 x 26 (Since it’s fortnightly, the repayment is half of the monthly amount)
  • Total amount repaid each year
    • $30,000
    • $32,500
  • Extra paid each year
    • $0
    • $2,500
  • Tina pays $2,500 extra each year by switching to fortnightly repayments. She also paid off more of her home loan with fortnightly repayments. This helps reduce the balance on her home loan more quickly and builds equity.

What can I do with my unlocked home equity?

• Paying off your credit-card debt
• Paying off your car loans and personal loans
• Renovating your home
• Consolidating your unsecured debts
• Putting down a deposit for your next investment property
• Minor cosmetic renovations and structural renovations
• Cash out to invest in shares or your business
• Buying a business
• Luxury purchases such as a holiday or car

Types of Equity Loans

• Shared Equity Loan
  • A shared equity loan is where part of the loan has no interest on it. In return, the bank takes a share of the capital gains when you sell the property or refinance the loan.
  • For example, if you buy a home for $500,000, you may have a home loan of $400,000. Of this $100,000 (or 20%), you may be charged an interest fee. If the property is sold, the lender may take 40% of the capital gains. So if you sold for $600,000, the lender would take $40,000 (40% of the $100,000 gain).
  • The benefit of this type of loan is that there are no repayments on the shared equity portion so you’re able to borrow much more than you could with a normal home loan. The shared equity loan option is useful if you believe that capital gains will be minimal in the next few years.
• Property Share Loan
  • A property share loan is used when two or more friends decide to buy a property together. This allows them to have separate loan accounts which are in their own names, all secured by the one property.
  • For example, if Jack and Amy decide to buy a $500,000 property together, however, Jack’s deposit is $100,000 while Amy’s is only $50,000, then they may decide to have different loan sizes. Jack could have a loan of $150,000 while Amy would have a loan of $200,000. They would then both be contributing to 50% of the property value with either their deposit or loan.
  • In all cases when friends buy a property together, their loans will be guaranteed by each other. In the above example, if Jack was to miss his payments, then the bank could call on Amy to make the payments instead. For this reason, you must be careful as to who you buy a property with.
• Seniors Equity Loan
  • Seniors equity loans are also known as a reverse mortgage. They enable a retired person to release the equity from their home either as a lump sum or in regular instalments to help them fund a better lifestyle in their golden years.
  • There are no repayments with this type of loan as the interest is added onto the loan each month. The loan is repaid when the property is sold or from the borrower’s estate.
  • Care must be taken with this type of facility as often this loan will use up most of the borrower’s equity which will reduce the size of their estate to be passed onto the next generation. We always recommend that you seek independent legal and financial advice regarding the loan and also inform your next of kin of your decision to take out a loan using your equity.

Can I really buy my next property WITHOUT deposit?

• Equity Loan
  • Equity is the difference between your property’s value and the amount you owe on your home loan. You can use your built-up equity to finance your deposit for a second property. You can generally release up to 80% of the value of your property, minus what you still owe on it, for this purpose.
  • To qualify for an equity loan:
    • You must owe less than 80% of the property value on your home loan.
    • Your home loan repayment history must be perfect.
    • You’ll need to provide your last two payslips.
    • You’ll need to provide your most recent group certificate.
    • Low doc options are available for self-employed borrowers who can’t prove their income through traditional means.
    • Your credit file should be clear of bad marks.
  • Depending on how much equity you have, you can refinance to access it and cover the cost of your deposit as well as the other costs of purchasing a property.
• Cash-out
  • Cashing out is when you draw cash out of your equity and use it as your deposit to purchase a second property.
  • Generally, it’s best that you provide a letter from your conveyancer confirming that you’re looking for a property, or a copy of the Contract of Sale to prove you’ve found one.
  • Some lenders have restrictions limiting the amount you can cash out to anywhere between $10,000 and $50,000.
• Cross-collaterisation
  • This means using your existing home as security for the new purchase, bringing both properties under the one home loan.
  • To do this, you must owe less than 80% of the property value of your home.
• Line of Credit
  • If you’re on a professional package and in a position to do so, you can refinance your current home loan and open a Line of Credit (LoC).
  • A LoC works very much like a large credit card, and it’s beneficial if you need a deposit to buy an investment property.
  • Depending on the amount of equity you have and the strength of your financial situation, you can increase your LoC borrowing limit to fund renovations and general improvements to the property you’re purchasing.
• Joint Ownership
  • Do you have a strong income? Have you found a great investment opportunity, but can’t quite scrape together the deposit because of your current home loan commitments?
  • Joint ownership can allow you to buy a second property with a co-borrower who has the deposit to put towards the purchase.
  • It’s essential to seek financial advice before considering this form of ownership because there can be problems if you decide to sell the home. You also have to consider how to share the ongoing costs of ownership.
• Vendor Finance
  • Vendor finance, or owner’s finance, is risky and costly.

Why should I buy my next property WITHOUT deposit?

• Long-term Property Investment
  • There’s an old saying that it’s not about timing the market but time in the market. In saying that, taking advantage of a great investment opportunity when you see it requires you to move quickly. The market just won’t wait around for you to save the deposit you need. A no-deposit option gives you the ability to leverage the equity in your home to buy now.
  • Over the long term, you’re potentially reaping a higher capital-growth return by minimising how much of your own savings you put into the purchase. It also allows you to keep your cashflow fluid so you can invest in other properties or undertake capital improvements to the property. Having cash on standby is usually a good investment strategy.
• Short-term Investment
  • House flipping – buying a home to renovate it and re-sell it quickly – is common among investors with renovation experience who do their research.
  • The trick is to buy at what you believe to be below-market value and undertake minimal renovations to sell at a higher price for a return on investment.
• Buying Your Dream Home
  • Good properties don’t stay on the market for long, whether you’re an investor or a homebuyer.
  • The first property you buy isn’t typically the one you want to stay in for the rest of your life. It could be that you’re expecting children and want to upgrade to a bigger home or you’ve changed jobs and need to move to a new location.
  • When there’s a property that has everything you need, using a home equity loan can help you avoid heartache.
  • Alternatively, it may be that you’re not in a position to move just yet, but you want to get in early, buy low, and rent out the property in the meantime.
• Divorce and Separation
  • Separating from a partner is never easy, but it’s possible to ease the transition to a new property using the equity in the existing home.
  • This is common for couples with children, where one partner will stay in the family home while the other will move out.
• Holiday Home
  • Holiday homes aren’t generally as expensive as the home you live in because they tend to be located outside of major cities.
  • So it may be possible to use equity to cover all of the purchasing costs.

Can I use my land equity for a construction loan?

• You can use your land equity as a deposit for a construction loan. Borrowing up to 95% of construction costs requires a strong financial position, perfect credit, regular income, and genuine savings. With a guarantor loan, you can borrow up to 100% of construction costs. Your borrowing power depends on the land valuation: higher land value lowers Loan to Value Ratio (LVR) and makes loans easier and cheaper, while lower land value increases LVR and makes loans harder and more expensive.
• Investing savings into land you plan to build on can be beneficial, as it increases land value for a construction loan. However, if not building within 12 months, hold onto savings for better accessibility. When buying land, consider factors like location, services, size, and access.
• For land equity construction loans, consider up to 80% of land value plus construction costs, but ensure you apply with the right lender. Most banks don’t lend for cost-plus building contracts. The benefit is using land equity to build sooner without saving a deposit.

• Higher Costs:
  • Pay 10-20% more than the investor paid.
  • Interest rates 1-4% higher than the investor’s bank rate.
• Vendor Control:
  • Cost and interest rate depend on risk and refinance speed.
  • Home loan in the vendor’s name risks repossession if they can’t repay.
• Equity Building:
  • Harder to build equity and qualify for a standard home loan.
  • Harsh penalties for missed repayments.