Using Equity in Your Home
If you own a property, be it your own home or investment property, there is a good chance you have built up some equity. Now, it is possible to access this equity to assist you when buying an investment property, doing a renovation, or more.
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If you own a property, be it your own home or investment property, there is a good chance you have built up some equity. Now, it is possible to access this equity to assist you when buying an investment property, doing a renovation, or more. Read on to learn more about this concept.
What is Home Equity?
Your home equity is the difference between the current value of your home and the balance of the mortgage attached to it.
How do I work out how much equity I have in my home?
This is best demonstrated by example.
Suppose your property is valued at $1,300,000 and it has a mortgage with a remaining balance of $600,000. In that case, the equity is the difference between these two amounts.
$1,300,000 (home value) – $600,000 (remaining mortgage) = (equity)
What does Equity Release Mean?
Now that you have worked out the equity, the question turns to how you can access this equity. The equity is ‘released’ either via a top-up with your current lender or a refinance to another lender if they can put forward a better offer for your circumstances. Both enable you to borrow against the equity in your property.
With the top-up option, you borrow more funds on top of your current mortgage, which can be actioned quite quickly. A remortgage to release the equity (refinance) will take more time as it is a new application.
Accessible or Useable Equity
It is important to note that in most instances, not all your equity is available to be released. Generally, you can borrow up to 80% of the value of your property. This is known as your accessible or useable equity.
If we use the same example as above:
Home Value: $1,300,000
Remaining Mortgage: $600,000
80% of Home Value: $1,040,000
Useable Equity is worked out as follows
$1,040,000 (80% of $1,300,000) – $600,000 (remaining mortgage)
Useable equity = $440,000
In this case, although there is $700,000 of overall equity, only $440,000 of it is accessible or can be considered as useable equity.
Work out how much useable equity you have in your property with our home equity calculator
What can I do with an Equity Release?
Once equity has been accumulated, it’s good to know what you may be able to use it for. Lenders allow equity release loans for certain purposes. Acceptable purposes include
You must confirm that the lender will accept the purpose of your equity release. At Lendstreet Mortgage Brokers, we have a strong relationship with our lenders and we can work with you to determine this.
How much equity will a lender release?
Like most things, this varies from lender to lender. Factors that contribute here are
The valuation. The lender will organise a property valuation to work out a current market value for your property. An interesting point here is that valuations may vary between lenders.
Your borrowing capacity. To realise any available equity, your financial situation will need to be assessed to ensure you can repay the loan once it increases as a result of the equity release.
Purpose of the equity release. Depending on the amount of funds you are requesting as part of the equity release, the lender will need to understand the purpose and, in some cases, may require evidence. This can include quotes, copies of contracts for renovations, letter from a financial planner for share purchases, banks statements for debts consolidation, and many more. Generally, equity releases of less than $10,000 do not require a purpose.
Are you interested in getting finance via an equity release? Contact us now.
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