Equity is the difference between what your home is worth and how much you owe on it.
For example, if your home is worth $300,000 and you owe $100,000, you have $200,000 in equity. Over time, as you reduce the amount you owe on your home or the value of your home grows, your equity increases. It’s that simple. You can then use your equity toward financing another property, holiday, home renovations, the list goes on! Below are some equity building options:
Increasing the value of your property
One way to build equity in your home is through renovations or extensions to increase its market value.
You can contact me for a market analysis to help understand property values in your area and to make a more informed decision about how much to invest in renovations and what the standard percentage compared to property value is best to use as a spending guideline.
Increasing the regularity of your loan repayments
You can save by making fortnightly or weekly repayments instead of monthly. If you choose fortnightly repayments, you’ll pay half of your monthly repayments each fortnight.
Because there are 26 fortnights every year, this is equivalent to making an extra month’s payment each year. This means you’ll build equity in your home more quickly, pay off your loan sooner and save in interest.
Case Study: Bobs’ Home Loan
Bobs’ required monthly repayment amount is $1,617 on a $250,000 loan with a loan term of 25 years. Paying monthly, Bob will pay a total of $19,404 in one year ($1,617 x 12).
He decides to pay fortnightly instead, so his repayments become $808.50 a fortnight ($1,617 / 2). After 26 fortnights in that year Bob has paid a total of $21,021 ($808.50 x 26), which is equivalent to an extra month’s repayment. With these additional repayments each year, he’ll be able to pay off her loan approximately four years sooner and save $43,000 in interest.
Making larger than required repayments
You also have the choice of paying more than your required monthly repayment amount to build your equity. This way you could also reduce your loan term and save on interest. To do this you can make additional lump sum repayments when you have extra cash. Or, schedule your Direct Debit or Automatic Funds Transfer to be higher than your required repayment amount.
Case Study: Jack’s Home Loan
Jack’s required monthly repayment amount is $1,941 on a $300,000 loan with a loan term of 25 years. Over the term of the loan he’ll pay a total of $23,292 in one year ($1,941 x 12), and over 25 years he’ll pay $582,300.
Jack decides to set up a Direct Debit of $2,300 instead. If he maintains this over the years he’ll end up paying off his loan seven years early, saving over $90,000 in interest. Or, if he pays $1,150 fortnightly instead, he’ll pay off his loan nine years early and save over $115,000 in interest.
Making additional lump sum repayments
If you can make lump sum repayments, you could quickly build up the equity in your home. These additional repayments can also have a positive effect on how much your total repayment amount will be. Especially if they’re made in the early years of your loan.
Case Study: Jenny’s Home Loan
Jenny’s Required Monthly Repayment Amount is $1,868 on a $300,000 loan with a loan term of 25 years. Over the term of the loan she’ll pay a total of $22,416 in one year ($1,868 X 12), and over 25 years, Jenny will pay $560,400.
After five years, Jenny receives an inheritance of $50,000. Dividing the money, she puts $30,000 into her home loan and $20,000 into her Everyday Account, to use for an overseas holiday. Making the lump sum repayment of $30,000 means that instead of paying off her loan after 25 years, she’s reduced the loan term to almost 21 and a half years – if her repayments remain the same over the years.
Making a lump sum payment of $30,000 after five years reduces the loan term by approximately three and a half years. Jenny will also save over $53,000 in interest.
Open an interest offset account
You could save thousands of dollars in interest and pay off your home loan faster with an offset account.
An offset account is a special savings account linked to your home loan. The savings held in the account are offset on a daily basis against the balance of your loan, which means every cent you deposit helps to build your equity. Most offsets provide full transactional capability, real time banking while offsetting 100% of the credit balance against the balance of an eligible home loan.
Build equity in your home loan
Refinance and take advantage of historic low interest rates, then keep your repayments as they were (higher than the new repayment on the lower interest rate) and you will knock thousands off your mortgage.
Scenario Source: CBA