You could be sitting on a gold mine, with more home equity than you realise. Reinvesting that money can be a smart way to grow wealth.
Home equity is the difference between the value of your home and the balance of your loan. So if the place is worth, say, $600,000 and there’s $400,000 remaining on the loan you have equity of $200,000. That money represents an important financial resource that you can use to open new investment opportunities.
Use equity in lieu of cash
In years gone by the only way to tap into home equity was to sell your home. These days, lenders will use equity as security on another loan, allowing you to borrow at low home loan rates to fund a variety of purposes including an investment property.
Put simply, your home equity can be used in lieu of a cash deposit to let you become a property investor. The appeal of this is that the interest on your investment loan can normally be claimed as a tax deduction, which makes the repayments even more manageable when combined with rental income.
Valuing your home
Knowing the value of your home equity requires an up to date loan figure plus a value for your home.
It’s simple to determine the loan balance – check your latest statement, contact your lender or ask your Aussie broker to speak to them on your behalf.
The more challenging issue is putting a value on your property. There are several options here.
A local real estate agent can provide an appraisal of the property at no cost but they may bump up the value if they believe a listing could be on the cards.
An alternative is what is known as ‘automated valuation models’ (AVM) which draws on public and private databases of sales results. These are available through providers like RP Data or Australian Property Monitors, and the cost will vary in line with the complexity of the reports you opt for. The common thread is that the values provided are based on sales in your area. If your home is distinctly different – for example with unique views, or you’ve completed major interior renovations, these differences may not be reflected in the reports you receive.
Electronic valuer reviews
A potentially more reliable valuation is an ‘electronic valuer review’ (EVR). This involves a remote valuer combining photos and descriptions of your home with recent sales data for the area to arrive at a value. It will cost more than an AVM but with more information to base the final figure on, the report you receive should also be more accurate.
Professional valuations – the gold standard
The gold standard in discovering what you home is worth is a report prepared by a Certified Practising Valuer (CPV) or Residential Property Valuer (RPV). The valuer will check out the place from top to bottom, inside and out, and provide a report that states a final value for your home and an explanation of how the figure was determined.
A professional valuation can cost upwards of $500 and while it should give you an accurate idea of your home’s value – and thereby help you determine home equity, it won’t be relied on by your lender. That means you can still expect to pay a lender’s valuation fee where it applies.
Talk to your broker
If you plan to use home equity as a means of funding an investment, it’s worth speaking with your Aussie broker before you pay for a valuation. Your Aussie broker can let you know what lenders are currently looking at in terms of valuations and refinancing criteria, and that could save you plenty of time – and money, in the refinancing process.