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What is equity?
“Equity is one of those common mortgage terms that everyone is unfamiliar with,” says Robin Lim, head of mortgages product management at National Australia Bank.
Here is a quick guide to equity for those who need a refresher.
“Equity can best be defined as how much your home is worth minus how much you owe to the bank,” Lim says Robin Lim.
He explains that how you can work out how much equity you have with this simple equation.
Home worth – debt = equity.
Related: Equity Calculator
“If your home is worth $100, and you have $80 that you owe to your bank, you effectively have $20 built up,” Lim says Robin Lim.
There are two ways you can access equity
1. Minimising how much money you owe the bank
“You might pay down your loan faster. If we go back to that example, if you pay down that $80 down to $60, you’ve actually demonstrated $40 worth of equity in your home,” Lim says.
2. Appreciation of your property
“If your home appreciates in value from $100 to $120, you’ve also increased the level of equity in your home,” Lim says.
What you can use the equity in your home for:
– Home renovations
– Buying shares
– Buying more property
Robin Lim says it’s important to speak to your banker or broker to see if you have the ability to service you loan.
Domain’s senior economist, Andrew Wilson, says there are many benefits in releasing equity in your home loan for other investments.
“That has certainly been a successful model for investors: funding the purchase of another property from the equity that you’ve accumulated in your existing property. It remains a positive way of growing wealth,” he says.
This has been a model smaller investors have relied on in growing wealth.
“It has been a model that small investors have been utilising the equity in a property as it grows, and to use that equity as a deposit on another property,” Wilson says.
“Over time, the equity grows to keep moving forward. That’s been a positive investor model.
“It does reflect the underlying strength and resilience of Australia’s capital city housing market. Generally, it’s been a positive financial model for many Australians,” he says Andrew Wilson.
If you don’t own property, you miss out on a lot of advantages available to home owners.
“There are considerable taxation advantages for property owners,” Wilson says.
“They don’t pay capital gains tax on the sale of their property if they sell the family home.
“If they are investors, they get a discount on the concession rates for capital gains when they sell their investment property; they can negatively gear their investment property so they can claim their interest costs against other income; and they also get to write off the value of their investment property through tax appreciation,” he says Andrew Wilson.
It seems those lucky enough to own property are sitting pretty, while where many first home buyers are priced out of the market.
“It’s geared for those who do have property, and it becomes a self-perpetuating advantage because people can buy more property and take advantage of those taxes to continue to build wealth,” says Andrew Wilson says.
He says continues in saying those who don’t own property don’t have the same options available.
“The other options don’t have the same type of advantage going forward now, in as low yield environment with interest rates and growth rates. The tax-enhanced yields and returns on investment property will become even more attractive and advantageous to those who own property.”