If you own a home or property, you will likely be well aware of the term ‘home equity’. In fact, as we watch the rising cash rate and house prices, the equity in your home can seem like your property ‘trump card’.

Today we’re taking it back to basics and talking home equity 101. Let’s look at what it is, and the steps you can take to access it.

What is home equity?

Home equity is the financial difference between the market, or appraised, value of your home and your remaining mortgage debt. The equity in your home, therefore, changes over time. This will happen as you make mortgage repayments and as the value of your home increases (or decreases!) through market fluctuations or through improvements you make to the property.

You can think of home equity as your home’s market value minus the balance on your mortgage. You’ve already paid your deposit and made monthly mortgage repayments, most likely over several years. If your home has steadily increased in value over those years, reflecting the market and any improvements you have made, your equity will naturally grow over time.

How to calculate your home equity

To calculate the equity in your home:

1. Arrange for a market valuation of your home. A market estimate can be provided by a real estate agent, who will compare your home against recent sales in your local area. Or you can engage a certified practising valuer to undertake a real property valuation of your home.
   
   
2. Check your mortgage records to confirm your outstanding balance.
   
   
3. Subtract your outstanding mortgage balance from the estimated value of your home to get the current equity in your home!

It’s important to remember that the amount of equity in your home is fluid. It will depend on market fluctuations, ongoing changes to your property, and your continued mortgage repayments – all of which are frequently changing.

Accessible home equity

Understanding how much equity in your home is just the first step. You will also likely want to understand how much of that equity is actually available to you. This amount is called your ‘accessible home equity’.

In other words, if your home is valued at $800,000 and your outstanding home loan balance is $400,000, this doesn’t necessarily mean you have $400,000 available to access. To turn equity into liquid cash to use for other purposes, you will be effectively taking out an additional home loan (or additional amounts under your current home loan). Because of that, all the typical requirements of a home loan remain applicable.

The lender will review your current income and expenses, your existing debts and any other information that remains relevant to your ability to service a home loan. And lenders will generally also consider the reason for which you wish to access your home’s equity. They will then make the determination of how much they feel comfortable lending you from your current equity pool.

How to grow your home equity

To increase the equity in your home, there are a few things you can do over time:

• Review your regular expenses to assess where you can make savings to put towards your mortgage.
• Put any windfalls, including tax refunds, towards your mortgage.
• If you are a double income household, if you can, commit one income solely to mortgage repayments.
• Consider how you can renovate or otherwise improve your home to increase its market value.

How to use your home equity

Once you understand the amount of equity you have in your home, you might want to access it. You can borrow against your home for many different reasons, including to:

• Refinance your existing mortgage.
• Pay a cash deposit for an investment property.
• Renovate your home.
• Purchase a car.
• Fund a holiday.

To access the equity in your home

Once you know your home equity and the dollar amount of equity you’d like to access, here are the steps to take:

1. Know what you need. Understand the amount of equity in your home, your projected accessible home equity and the dollar amount of your particular investment, refinancing or other loan amount or renovation project. Be sure this amount falls within your accessible equity.
   
2. Research your loan options. Our Lending Loop team of experts can help you to know which lending option will be best for you and your circumstances. We have access to a vast range of bank and non-bank lenders, with hundreds of different loan products.
   
3. Understand the costs and fees associated with your home loan. These can include break fees if you change home loan lenders, or you may need to pay Lender’s Mortgage Insurance (for example, if your equity is less than 20% of the property’s value).
4. Our Lending Loop team can help you understand the best lending product options for your situation.
5. Complete your loan application. Once you’ve decided on the amount of home equity you wish you access, a lender and loan product, it’s time to complete a loan application. Our Lending Loop team can help you through the application process.

Read more: Equity home loans and how they can help you  

At Lending Loop, our expert team can help you to calculate and access your home equity and help you through the loan application process. Whether for refinancing, renovating, investing or another purpose, we can help to find the best loan product for your needs, from our extensive range of over 40 lenders. Get in touch today.