If you’ve owned a property for any length of time, chances are you have equity. Here we explain what equity is, and what you can do with it.

Equity explained

Equity is simply the difference between the market value of your home and the the amount you have left to pay on your mortgage. If you own a house worth $800,000 and you have a mortgage of $500,000, then you have $300,000 in equity.

Equity is, in effect, the profit you would have if you sold your property and paid off your mortgage. Of course, you never know exactly what your house would fetch at a sale or auction, but by watching the real estate market or getting a property valuation, most property owners have a reasonable idea of the value of their place.

  1. So then what?

Many people sit tight on their equity, knowing that as their mortgage gets lower and lower and their property value stays the same or (hopefully) rises, they’re building a reserve of wealth for the future.

For others, equity means opportunity. Lenders are typically happy to accept equity as collateral on a new loan, for example to start a new business. Some people use their equity to fund a line of credit to cover recurring costs such as business expenses, education tuition fees and the like.

But most people who opt to use their equity do so to fund further investments, typically in property. Depending on your circumstances and credit history, your lender might be prepared to offer you a loan for a property worth three-to-five times your equity.

With $300,000 in equity, you might be able to borrow $1 million or more. Even if you invest in a property for less than this amount, it’s easy to see how people use equity to build significant property portfolios.

Caution needed

As the saying goes, anything that seems too good to be true probably is. There is risk associated with borrowing based on home equity. The biggest risk is that housing values decline, as happened in the USA during the global financial crisis. If your $800,000 house is suddenly worth $400,000 and your mortgage is $500,000, your lender might foreclose on your loan. If you also have a loan based on previous equity that no longer exists, you may be at risk of losing everything.

This is a dire and unlikely set of events, but it’s important to understand how lenders might act in different scenarios.

The best advice

The Mortgage Broker Sydney team are experts at loans and lenders, and understand what options you have with the equity in your property. If you want to access your equity and get it working for you, we can help.

Contact Mortgage Broker Sydney today for advice. Best of all, our service is FREE for you.

Phone: 1300 983 670