You may not feel richer, but if you’re a homeowner, there’s a decent chance your personal wealth has surged over the past 12 months thanks to soaring property values. And it could open up a world of exciting possibilities.
Sometimes you’ve just got to shake your head in disbelief at the resilience of the property market.
Despite a cost of living crunch and higher interest rates, national home prices have somehow ploughed on over the last year and a bit.
CoreLogic says home values nationally are up $71,832 since January 2023 – a jump of 10.2% in just 14 months – which averages out to an increase of $5,130 per month.
To put that into perspective, last financial year the average full-time Australian worker earned $6,565 per month after tax.
The thing is, higher values can give homeowners much more than a warm inner glow.
Rising property prices can also provide opportunities to boost your wealth further – without having to hammer in a For Sale sign out the front.
Let’s take a closer look.
Your home equity can unlock further wealth
An uptick in your home’s value can drive an increase in home equity – assuming your mortgage hasn’t increased.
Home equity is the difference between the market value of your home and the balance of your home loan.
So if your home is valued at $1,000,000, for example, and you have $500,000 left on your home loan, your home equity is $500,000.
The exciting thing about home equity is that it’s not just a number on a page. It can be a valuable resource that helps you forge ahead financially.
Three ways to make home equity work harder
Plenty of banks let you use home equity as security for additional borrowing or to refinance your current home loan – all without having to sell your home.
Here are three ways you could make your newly enlarged home equity work harder:
1. Refinance to save on interest
Your home loan is probably one of your biggest household expenses.
Refinancing to a new loan or lender can help you save with a more competitive rate, or by taking advantage of loan features that help you pay off the mortgage sooner (such as an offset account).
And the more home equity you have, the easier it can be to refinance.
2. Use your home’s equity to fund an investment property
Your home equity may be used as a deposit on an investment property in lieu of cash savings.
By becoming a landlord, you could benefit from regular rental income, potential tax savings, and an increase in the value of your rental property over time.
Not to mention having a nice little nest egg that could help fund your retirement or – if you’re feeling particularly generous – pass on to your children.
3. Put home equity to work funding renovations
One of the beauties of home ownership is that you can add value to your property – regardless of what the market is doing – with a few well-planned renovations.
But how do you fund those renovations if you’re tight for cash?
Well, one way is to tap into your home equity to fund the renovations.
So how does ‘cashing out equity’ work?
It might sound complicated – but we promise it’s not.
Let’s say you bought an $800,000 house three years ago that, partly due to last year’s property price surge, is now worth $1 million.
And let’s also say you originally took out a $600,000 loan for that house, which you’ve managed to pay down to $500,000 (you little beauty!).
By refinancing that $500,000 loan into a $700,000 loan (70% of your property’s new market value), you can unlock $200,000 in equity to help fund your renovations or as a deposit to buy an investment property.
It’s also worth noting that banks typically let you borrow up to 80% of a property’s market value.
Which means if you upped the ante and refinanced to an $800,000 loan, you might be able to unlock $300,000 in equity.
So if you’d like to make your home equity work harder, call us today for a clearer picture on how much equity you have – and how you can tap into it to potentially grow your wealth.
Ollie Hooper – Mortgage Broker (Stax Home Loans) m: 0401 032 868
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