Using Home Equity to Renovate Your Home

If you want to reach your home ownership goals and achieve financial success, it’s important to have a solid understanding of home equity. More specifically, you need to know how it can be used to further your own investments and get closer to your financial goals.

There are many different ways to take advantage of your home equity. In this blog, however, we’re going to focus on how you can use your equity on home improvements. Using home equity for renovations is a great way to enhance your living space without having to take out another loan or having to spend money from your savings account.

This short guide will help you decide whether or not using home equity for your home renovations is right for you.

What is Home Equity?

Home equity is the difference between the value of your property and the amount that you owe on the home loan. In other words, it is the percentage of your total property value that is actually under your ownership. As a general example, if your property is worth $400,000 and your loan amount is at $200,000, then your home equity is $200,000.

That being said, since property values are affected by so many different variables, your equity can grow even if you haven’t made a mortgage payment towards your loan. In theory, if the value of your property increases, your home equity can grow as well.

Another thing to know is that your home equity and your usable equity are two different figures. With most lenders, you can only use up to 80% of your home equity. In the example used above, your usable equity would be 80% of $200,000, which would be $160,000.

You can use this for many different things including buying an investment property, renovating your home, buying a car, or consolidating debt.

Additionally, according to Westpac, if your Loan to Value Ratio (LVR) is greater than 80% after a loan increase, then you might need to get Lenders Mortgage Insurance.

The LVR is calculated by dividing your loan amount by the total value of your property. If we take the previous example, the LVR would be calculated by dividing 200,000 by 400,000, giving us 0.5. This means the LVR is 50%.

How to Use Home Equity for Renovations

There are two main ways to use home equity for your home renovation project. One way is via a home increase and the other is via a supplementary loan.

Before you do either of these, you should plan out your renovations and figure out how much it’s going to cost. Keep in mind that renovation projects often cost more than initially anticipated. Because of this, you should always make allowances for unforeseen expenses.

Additionally, make sure you consult reliable renovators and custom home builders to get the most accurate quotes possible.

• Home Loan Increase
  
  A home loan increase, or more commonly referred to as a top-up, is a method of borrowing money against your current property. If you have enough usable equity, you can use a home loan increase to raise your loan limit and access additional funds for your home renovation.Renovating via a home loan increase will generally give you a lower interest rate compared to other options such as taking out a personal loan or using a credit card. That being said, it could also increase your loan repayments significantly.Because of this, you should make sure you’re in a position to make larger repayments should your monthlies increase after the top-up. Home loan increases can only be used on variable-rate home loans and for projects that don’t require constriction.

  Additionally, as per Westpac, a top-up can be used to fund a home improvement project so long as it costs $250,000 or less. Any more than this will likely require you to get a construction loan.

• Supplementary Loan
  
  You can also use your equity to create a supplementary loan that is separate from your current home loan. Getting a supplementary loan means you can get a different loan period, a different interest rate, and different terms on your home renovation project. This option is typically used by those on a fixed-rate home loan in order to avoid paying break fees.

  Regardless of which option you choose, your lender will need to know about your current living expenses and your current financial standing. They will also require proof of income so that they know that you will be able to make the repayments on both your property and your home improvement projects.

  As such, if you want to borrow against your home equity, you want to evaluate your current financial standing to get an idea of what you can afford. You don’t want to go into a hefty investment without being prepared for unforeseen problems down the road.To help you make better financial decisions, you should speak to financial advisors as well as trustworthy renovators about your home improvement plans.