Over the last 18-24 months property prices in Brisbane and around Queensland have increased some 30%. What this means is that if you have been holding property since at least 2020, your holdings have appreciated by at least 30%. If this is you, there are ways to unlock this capital and put it to work in a way you see fit. A lot of people choose to draw on equity to improve a property or add to existing investments.
What is equity?
In finance or accounting, equity refers to the ownership of a given asset that may have either debt or liability attached to it. An example of that would be a business or a piece of real estate, and would not apply to a commodity asset like gold.
So, when speaking about your equity in an asset, it represents either the percentage or monetary amount that you own of the asset. For example, if you buy a house and the sale price is $1M and you pay a deposit of $200k, this means in that home you have $200k or 20% equity. If the value of the home increases by 30% over a given period of time. Assuming that all other factors remain the same, the value of the home is now $1.3M and the value of your equity is $260k (They have both increased by 30%).
How do I build my own equity?
There are a few ways to increase the equity you have in a piece of real estate. Some of them you can control and some you simply cannot. Here are the 5 most common ways you can improve the equity you have in a property:
1. Capital Appreciation – Over time, market values increase and the same will happen to your property. This is entirely out of your control though.
2. Make a large down payment – The bigger your deposit on a home, the more equity you will have going forward.
3. Increase the property value – This can often be the one you have the most control over. There are many simple, cosmetic, and inexpensive things that can be done to a property to increase the value of it. The rooms said to have the most impact on the price of a property are the kitchen and bathroom. Good improvements to the quality of those rooms don’t have to cost much, but they do help to increase the value and marketability of the property.
4. Increase your payment amount or frequency – Another simple and logical way to increase equity in the home is to increase the repayment amounts or frequency. If the repayments are increased, you will accumulate equity in the home quicker.
5. Refinance – Another really good option, but this is not always entirely in your control. If you are able to refinance the debt, and reduce the interest rate or the loan duration. The net output, will be you build up equity faster and pay the bank less.
How do I access and use my equity?
Before we get into how to access your equity. We need to talk about usable equity. Usable equity is something that will be predetermined by the financial institution. It is normally around the 80% mark though. Useable equity exists because banks will not debt finance the full amount of a piece of real estate. For example, if you own a house worth $1M and your equity is $1M, the bank will only lend you up to $800k. Banks do this to protect themselves from negative equity. In the event they own 100% of a home and the market fluctuates below the price initially paid for the property, they can end up in a position where they lent you more than the house is worth.
Most people access their home equity to either improve their home or to purchase another asset. These are use cases that banks like to see, because it means that they are able to get their money back in the event that the borrower is no longer able to make the payments.
The last thing to consider before refinancing to access home equity is which institution are you going to use and which one offers the best terms. Speak to a few bank managers and mortgage brokers to make sure they understand what you are wanting to achieve and they should be able to help you!
