Strategies for Using Home Equity: A Guide for Australian Homeowners

Your home equity is more than just a number on paper, it’s an extremely valuable financial tool in your financial journey. Whether you’re planning renovations, looking to invest in property, or simply want to consolidate debts, using your equity strategically can make a big difference.

What is Home Equity?

Home equity is the difference between your property’s current market value and the remaining balance on your home loan. For example, if your property is worth $800,000 and your mortgage balance is $500,000, you have $300,000 in equity.

Smart Ways to Use Your Equity

1. Top-Up Loans (Loan Increases)

A top-up loan allows you to borrow additional funds by increasing your existing home loan. This is one of the most common ways Australians use their equity, as it keeps things simple by consolidating your loan into one account.

• Example: Sarah in Brisbane wants to renovate her home and estimates the cost at $100,000. Her property is worth $700,000, and she has $400,000 left on her mortgage. With $300,000 in equity, Sarah can apply for a top-up loan to fund her renovation.
• Key Point: Your lender will likely require a property revaluation and reassess your financial situation before approving a top-up loan. Availability will depend on your lender and your specific loan.

2. Cash-Out Refinancing

Refinancing allows you to replace your existing loan with a larger one, freeing up some of your equity as a lump sum. This is ideal for consolidating high-interest debts, funding larger expenses like school fees, or pursuing investment opportunities.

• Example: Paul in Sydney has a mortgage balance of $500,000 on a home valued at $900,000. By refinancing to borrow up to 80% of his property value ($720,000), he can access $220,000 in cash for a deposit on an investment property.
• Key Point: Be cautious with this option. Over-borrowing can increase your repayments, so work with a broker to plan carefully.

3. Using Equity as a Deposit

You can use your equity as security to fund the deposit for a new property. This strategy is popular among investors and upgraders.

• Example: Emma and Jack in Melbourne want to buy a $600,000 investment property. Instead of using cash savings, they use $120,000 of equity from their current home to cover the 20% deposit.
• Key Point: Using equity for a deposit eliminates the need for upfront cash, but remember you’re leveraging your current property, which comes with risks if the market fluctuates.

4. Home Equity Line of Credit (HELOC)

A HELOC gives you access to a revolving line of credit secured by your home equity. It’s flexible, allowing you to withdraw funds as needed for renovations, emergencies, or even travel, however demand for these types of products is at an all time low.

• Example: Chris sets up a $50,000 HELOC against his home in Perth. Over three years, he draws $20,000 for renovations and repays it before using another $10,000 for a family holiday. He only pays interest on the amount he uses.
• Key Point: HELOCs are less common in Australia than in other markets, but similar products are available, often with slightly higher interest rates than standard mortgages .

Things to Consider Before Accessing Equity

1. Costs, Fees and taxes: Lenders may charge fees for refinancing, property revaluation, or setting up new facilities. There are also tax implications for investment properties that need to be considered.
2. Serviceability: Your ability to repay the increased loan amount will be reassessed. A broker can help you understand what lenders are looking for.
3. Risks: Remember, accessing equity means increasing your debt. If property values drop, you could find yourself in negative equity (owing more than the property’s worth).
4. Professional Advice: Navigating these options can be tricky. A mortgage broker can tailor strategies to suit your financial goals, whether you’re investing, renovating, or consolidating debt.

Which Option is Right for You?

Choosing the right strategy depends on your financial goals, property value, and risk tolerance. Whether you’re looking for flexibility, the key is to plan carefully and stay informed.

Ready to Use Your Equity?

Speak to one of our mortgage experts today to find the strategy that works for you. Whether you’re planning a renovation, investing in property, or looking for financial flexibility, we’ll help you make the most of your hard-earned equity.

The examples provided are only for illustrative purposes only.