How to access home equity to achieve your financial goals

Did you know that if the value of your home or investment property has increased since you first purchased it, you may have untapped equity which can be accessed? This is one of the key strategies many property owners use to unlock their goals such as renovating their home, upgrading to a new home or building an investment property portfolio. So, how do you access equity?

What is equity? 

Equity is the difference between the value of your property and how much you owe on it. When capital growth occurs over time or you make improvements to your property, the value of your property increases, which enables you to accumulate equity. 

If you own a home in Sydney (or another booming market) at the moment, no doubt you’ve gained equity in recent years, thanks to fast rising property prices. 

Let’s say for example you bought a home in Sydney four years ago for $1.5 million. In the current market, your home might now be worth approx. $2.5 million. That represents capital growth of $1,000,000. If you owe $1,000,000 on the home, then your equity would be $1,500,000. 

How to use equity to build wealth

You can borrow against equity, using it as security with the lender to buy an investment property, invest in shares, renovate or achieve other financial goals. Instead of needing to save a hefty deposit in order to be approved for a loan, your equity can enable you to borrow the additional funds with little or no deposit required, depending on your financial situation. 

In the scenario presented above, you have $1,500,000 in equity to leverage. Assuming an 80% borrowing maximum to avoid paying lenders mortgage insurance (LMI), your usable equity is $1,200,000. That’s a significant amount of money to channel into achieving your wealth goals. Keep in mind that you may not be able to use the entire $1,200,000 towards your financial objectives, as the ability to access this equity will still depend on your capability to service the additional debt. If you’re not generating income through working or you don’t have sufficient passive income to meet any new repayments, then it’s unlikely you’ll be able to access any equity at all.

Additional debt versus increased investment returns 

Investing into growth assets, such as shares or property that are generating an income and increasing in value over time, can make a lot of sense when the costs of borrowing those additional funds can be met from investment returns. For example, if you take out additional debt at 2.5% to invest into shares then the share portfolio only has to achieve above 2.5% after tax for you to be better off. With the Australian share market averaging around 10% p.a. for the last 10 years (with international shares even higher), then this seems like a pretty good long term bet. Also, when it comes to accessing equity to buy an investment property it’s often possible that with tax deductions and low interest rates the property could actually be cash flow positive after tax. This can even be the case when investors borrow 100% of the property value plus the purchase costs when accessing equity to buy an investment property. 

Accessing equity begins with a property valuation 

To understand how much equity there is in your home you will need to undertake a valuation. If you haven’t had your property valued in a few years or you’ve made improvements to your property in this time, you might be surprised by just how much equity you’ve gained. 

Want to find out if you have untapped equity in your property? Speak to the team at Orium Finance. We can arrange a free bank valuation for you so you can find out how much equity you’ve gained and what doors this may open for you. 

Orium Finance is open for business remotely during the NSW lockdowns. We are cloud-based, allowing us to continue operating as usual, including meeting with you virtually via Zoom and undertaking signatures for documents electronically when possible. Get in touch with us today to discuss your lending needs.