How to Use Home Equity to Finance Home Improvements or Investments

So you’ve had your house for a few years now, and you might be considering it time for some renovations, or even to expand your property portfolio with an investment. You also may have heard that you can actually do this using the equity in your home, rather than out of your savings account. So, how does it all work? This guide explores how leveraging your home equity can be a game-changer for financing renovations or expanding your investment portfolio, including tips on borrowing limits and the most effective uses of equity.

What is Home Equity?

In simple terms, home equity is the difference between your property's current market value and the amount you owe on your mortgage. In a way, it’s sort of like a hidden savings account that grows over time, as you chip away at your loan and as your home appreciates in value due to market changes or improvements you've made.

View this post on Instagram

A post shared by IDEAL FINANCIAL GROUP (@ideal.financialgroup)

When we talk about accessible equity, we're referring to the portion of your home's equity that you can actually borrow against or draw upon.

It’s important to note that just because your home's equity is say, $200,000, it doesn’t mean you can access that full sum. Lenders typically allow you to borrow up to a certain percentage of your home's value (often up to 80%, though this can vary by lender and your financial situation) while leaving a portion untouched as a buffer. This buffer helps protect both you and the lender by ensuring you don't owe more on your mortgage than your home is worth if property values fluctuate.

To calculate your accessible equity, you'd subtract the loan-to-value ratio (LVR) threshold from your home's value, then subtract your current loan balance from this amount. Using the 80% LVR rule as a guideline, here’s how it works:

Determine the Maximum LVR Value:
80% of your home's current value (e.g., 80% of $500,000 = $400,000).
Calculate Accessible Equity:
Maximum LVR value minus the amount you owe on your mortgage (e.g., $400,000 - $300,000 = $100,000).
In this scenario, your accessible equity would be $100,000, not the full $200,000 of your home's equity.

Should I Use Equity to Renovate?

Using equity to fund renovations is a smart move for many. Strategically chosen renovations can be deeply rewarding, improving your quality of life and significantly increasing your home's market value. Whether it's updating the kitchen, adding an extra bathroom, or enhancing outdoor living spaces, these improvements can offer a good return on investment when it's time to sell. It can also be a better finance option than personal loans or credit cards.

Things to consider:

It's important to avoid overcapitalising, which happens when the cost of renovations exceeds the value they add to your home. Research and planning are crucial to ensure your renovation project is in line with what's desirable in your market. Also, don’t forget about interest, as the equity you use will be added to your mortgage, on which you will pay interest on over time.

Can I Use Equity to Buy Investment Property?

Absolutely, and it's a common strategy for budding investors. Using your equity as collateral, you can secure a loan for a down payment on an investment property, potentially opening up a new income stream and increasing your wealth over time. Using equity to invest in real estate can diversify your portfolio and potentially increase your passive income through rental earnings. It's a savvy move that can pay dividends, provided you've done your homework on the property market.

Things to consider:

Property markets can fluctuate. Investing in real estate carries the risk of capital loss if property values decrease. Being a property investor comes with extra responsibilities, like managing tenants and property maintenance. There are also ongoing costs to consider, such as property management fees, insurance, and rates.

What’s the Smartest Use of Equity?

Identifying the "smartest" use of your home equity isn't a one-size-fits-all answer. It intricately depends on your financial situation, future goals, and the current economic landscape. It helps to reflect on your financial goals. Are you after a longer-term investment, or immediate value? There are also several other factors to consider, such as property market trends, renovation ROI, your risk tolerance, and the effect changes in your loan repayments will have on your weekly budget. Make sure you consult the professionals. A financial advisor can provide tailored advice based on your goals and financial situation. A mortgage broker can help explore the best ways to access your equity with favourable terms.

How to Access Your Home Equity

There are a few paths you can take to access your equity, such as refinancing your mortgage or opening a Home Equity Line of Credit (HELOC). Each option has its own set of pros and cons, from interest rates to repayment terms, making it essential to do your due diligence before deciding.

At IDEAL Financial Group, we specialise in making your equity work for you. Our team offers personalised advice, guiding you through your options to ensure your decisions align with your financial objectives and lifestyle aspirations. From assessing your borrowing capacity to identifying the smartest equity utilisation strategy for you, we're here to simplify the process and maximise your outcomes.

Ready to unlock the potential of your home equity? Contact IDEAL Financial Group today for a consultation that could transform your financial future.

Contact Us