What is Equity and how can I build it?

What is Equity

In its simplest form, equity is the value of your asset, be it property, machinery, a business, or other assets, less the amount of liabilities/debt you owe.

For example, if you have a home that is currently worth $800,000 on the market and your current home loan debt is $400,000, your equity would be $400,000 ($800,000-$400,000 = $400,000).

How can I build equity?

Numerous strategies exist to create equity in property ownership.

Consider the following options:

1. Buy below market value. While not always easy to achieve, purchasing a property below market value could potentially create free equity upon settlement. Conversely, paying more than market value for a property would result in a negative equity position. Historically, the property market has been very forgiving in Australia over the last 50 years and has risen consistently, if not doubled in some cases, over the last 10-to-15-year period.
2. Improve your property. Simple renovations like painting, floor and window coverings, gardening/landscaping, and a general tidy-up can create more value, thereby resulting in an improved equity position. More significant improvements, like kitchen, bathroom and laundry renovations, or a well-designed and executed extension, can create equity. This, of course, depends on the relative cost of improvements.
3. Pay down debt! The simplest strategy, and one employed by many immigrants, especially from Greek and Italian backgrounds, is to pay down debt as quickly as possible. This creates instant equity, even if the property doesn’t increase in value over time.

How do I use equity?

Making use of your equity depends on its relative equity percentage, or LVR (Loan to Value Ratio). This is calculated by dividing the loan amount by the purchase price/value of your property, expressed as a percentage.

A property valued at $500,000 with a home loan debt of $400,000 would mean you have 20% equity. ( $400,000 ÷ $500,000 x 100= 80%)

It’s important to note that accessing the initial 20% of your equity is not as straightforward as you might think. There exists a strong likelihood that you would be required to pay lenders mortgage insurance (LMI) to tap into that 20% equity, interest rates are usually higher, and lenders’ credit policies more stringent.

However, if your property is worth $500,000 and you owe $300,000, a 60% equity position, the potential to access up to $100,000 of your equity becomes available. This $100,000 could then be utilised as a contribution to the purchase of an investment property, holiday home, or business.

If you're curious about your property's equity and want to explore available options, don't hesitate to contact Homefree Mortgages. We can assist you in assessing your equity and discussing potential opportunities.