One of the most powerful features of owning property is your ability to access equity as it builds up over time.

Equity is the difference between the value of your property and any debt that you still own. Every time you make a repayment, you’re not only paying interest but you’re also increasing your equity. Similarly, your equity increases when the value of the property itself increases.

Through refinancing, homeowners are able to access that equity or “unlock it” to use it for other purposes.

For example, if you have a property valued at $600,000 and a loan of $400,000, then you have $200,000 of equity. If that property increases in value to $700,000, then you’ve now got $300,000 in equity that you can potentially access.

Lenders will often let you tap into the equity to use as collateral for new loans. 

Typically there are two ways to use your home equity.

As a deposit on an investment property

This is a very common strategy used by property investors as they look to build up a substantial property portfolio.

Over time as the value of their property has increased, the investor will tap into the equity and use it as a deposit on another home. This avoids the need to save for another downpayment and can expedite the process of building a property portfolio.

It is worth noting that even though you have equity built up in your home, lenders might not allow you to access all of it. Generally, a bank will allow you to release up to 80% of the value of the property, meaning you’ll need to leave 20% - similar to when you initially purchase a home with needing to use Lenders Mortgage Insurance (LMI).

For example, if you have $200,000 in equity you might only be able to access $160,000.

The other factor to consider is that you also need to have the borrowing capacity to service the loan. A lender will want to make sure you can make the repayments on the equity that has been released (the loan) based on your income and expenses and the current assessment rate.

Use equity to renovate your current home

If you own a property, then it’s also possible to release equity to help fund the renovation of the home.

If you have some large projects in mind, such as doing a structural renovation or adding additional rooms, then it might be worth looking at using equity.

The advantage of using equity over other things like personal loans is that you will typically get lower interest rates. Because the loan is secured by the property interest rates are normally lower. Your average mortgage is also going to attract a lower rate of interest than a construction loan in many cases.

Once again, the key considerations are how much you need to access and also remembering that you will need to be able to service any loans that you might have.

Other ways to access equity

If you’re planning to take out a mortgage on a first home, it’s worth looking at home loan products that offer features like an offset account or a redraw facility.

These features allow you to access any excess funds or additional mortgage repayments and are another way of accessing some of the equity in your home.

By having the features in place, you’re giving yourself more options and they can be used to quickly fund a small renovation or even a home deposit in some cases.

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