Using equity to your advantage

Many banks and financial institutions talk about accessing the equity in your property and using it to your benefit. Once you understand equity and how it’s used, you’ll be in a position to take advantage of the equity in your property.

What is equity?

Equity is the difference between the value of your property and the amount you’ve borrowed against it. You can calculate the amount of equity in your property by subtracting the balance owing on your loan from the current value of your property. The equity you have in your property can grow by paying your loan balance down (either through lump sums or regular extra repayments), or by the value of your property increasing over time.

How to use your equity?

When we talk about using your equity, we’re referring to accessing more funds based on the amount of equity you’ve built up in your property. This can be achieved through either redrawing any extra repayments you’ve made, applying for a credit increase on your existing loan or by applying for an additional loan using your current property as security. This means you might be able to borrow funds for renovations, a new car or a family holiday. You’ll have the benefit of a lower interest rate from a loan secured by your property, compared with a personal loan or a credit card.

Things to consider 

Here are a few things you should consider when choosing to access your equity.

  • Restrictions on making additional repayments – If you set your loan up on a fixed interest rate, there will most likely be restrictions in place, which limit how much extra you can repay during the fixed term. To find out the exact set up of your fixed term it is best to speak to your mortgage broker or credit professional.
  • Your total lending amount will increase – When you choose to access the equity in your property, the overall amount you owe to the bank will increase. Whether this is via a redraw, a credit increase or an additional loan, this increase in loan amount will result in an increase to the amount of monthly interest you’ll need to pay.
  • Your monthly repayments may increase – If you’re redrawing additional repayments you’ve made over time, this will not have an effect on your monthly minimum repayments. However, any additional borrowing above your previously agreed loan amount will involve an increase to your minimum monthly repayments, and should be budgeted for accordingly.
  • Your LVR may increase – When accessing your equity through either a credit increase or an additional loan, your Loan to Valuation Ratio (LVR) will most likely increase (if your property value has increased greatly this may not be the case). This may mean that you’ll need to take out Lenders Mortgage Insurance (LMI) with the new application if your new LVR is above the cut-off point, which is generally 80%.

The 3 ways to access your equity 

There are three ways to access your equity. Your options are listed here.

  • Redraw – This is the simplest method of accessing any equity you’ve built up in your property as you’re drawing back any additional repayments you’ve made on your loan. View how to redraw on your loan.
  • Credit increase – A credit increase is when you apply to have the additional funds you’re borrowing added on to your current loan. View our how do I increase my loan section.
  • Additional loan – This is when you obtain extra funds by taking out a brand new loan and retaining your existing loan. This can be of benefit if your existing loan is in a fixed rate period, or there’s a reason why you’re not eligible for a credit increase. View our how do I apply for a home loan section for more information.