Got big plans for you and your family? Using the equity in your home can be the ideal way to finance your goals.
Paying off your mortgage might be an important priority, but it’s well worth balancing your goal of becoming debt-free against the benefits of having money to enhance your lifestyle or invest for your future. With interest rates holding steady at a low level, it’s arguably a very good time to be taking out a loan to finance your plans. And borrowing money against the value of your home can be one of the least expensive loans you can get.
How much equity do I have?
Research shows that many Australian households are equity rich, thanks to a steady rise in property values in recent years and record low interest rates encouraging borrowers to pay down their mortgages faster. In very simple terms, you can calculate the equity you have in your home by taking the current market value and subtracting the total amount of your current mortgage balance. So if your property is worth $400,000 and you have a mortgage of $150,000, then you have $250,000 in equity.
Borrowing more through your mortgage is an attractive option because interest rates for home loans are generally lower than for personal loans and you can have the option of paying it off over a longer period of time. So, using your equity can be a good option for borrowing money without making a substantial impact on your cash flow with large, high interest rate loan repayments.
Paying for lifestyle goals with equity
Before you head to the car showroom or travel agent to spend big, it’s worth thinking about your long term goals as well as your immediate needs. Although equity is a less expensive way to access cash for a brand new car or holiday, you’ll be paying off the loan for a long time after you’ve made the purchase.
It may be worth thinking about taking your equity and investing it for a lifestyle goal that will have a long term benefit, like setting up a fund for your kids’ education.
Using your equity can be a very effective way to build value in your home or generate a new source of wealth and income through investing. By extending your mortgage to upgrade your current property, you’ll get to enjoy a better quality of life in your home, but you won’t get a financial return on your investment unless you sell.
Taking your equity and using it to fund an investment property is another option to think about. If you plan it right, buying an investment property may boost your retirement savings and improve your future cash flow so you can afford holidays, new cars and school fees in years to come.
Get expert advice
If you’re looking at ways to access the equity in your home and how to use the extra funds, it’s important to get professional advice to make sure you’re making wise decisions based on your circumstances and goals.
Speak to a mortgage broker about your plans, and they can help organise a valuation of your property with your lender. Your broker can also help you work out how much equity you have, how much you can comfortably afford to repay and how to structure it within your home loan.
Have you made a major purchase or investment using the equity in your home? Tell us about your experience in the comments below.