Saturday 20th August 2016

Equity for property amateurs

Equity for property amateurs

If you’ve spoken with a mortgage lender or any self-professed property expert will tell you the equity in your home is the key to your future plans. But wait – what is equity?

While it might sound like another case of impenetrable real estate jargon, equity is actually a fairly simple concept. Allow us to explain.

What is equity?

Defined at its most basic, equity is simply the difference between the value of a home and how much you have left owing on that property’s mortgage.

To illustrate, let’s say you buy a property of $500,000 and you have a home loan worth $400,000. In this scenario, you have $100,000 worth of equity.

Is paying down my loan the only way to grow equity?

Certainly not! Paying down that fixed home loan is definitely one way you can take the reins in increasing the amount of equity in your home. However, let’s not forget that property is an asset that tends to rise in value naturally. As its value grows over the years, the gulf between how much it’s worth and the loan will get wider and wider, and leave you with substantially more equity to work with.

Why do I want to grow my equity?

Those people advising you about the benefit of equity weren’t wrong. Equity is essentially wealth sitting dormant in your property. It can, however, be ‘unlocked’ for a number of purposes. It can be used as security for loans for anything from cars to even holidays. You can even leverage it to buy another property, rather than saving up a whole new deposit.

What the real experts will do is then rent this investment property out to tenants, and receive a second stream of income. This revenue can then be put back into the original home loan, helping to pay it off quicker – pretty nifty, right?