Knowledge Centre

What is “Equity” and why is it important? All of your questions answered!

12/9/2024

When it comes to mortgage broking and home loans, one term you’ll often hear is “equity.” But what exactly is equity, and why is it so important? In this blog, we’ll break down everything you need to know about equity, how it works, and how you can leverage it to your advantage.

What is Equity?

Equity is the difference between the market value of your home and the amount you still owe on your mortgage. In simple terms, it’s the portion of your property that you truly own. For example, if your home is worth $600,000 and you owe $400,000 on your mortgage, you have $200,000 in equity.

How is Equity calculated?

Equity is calculated by subtracting the remaining mortgage balance from the current market value of your property. Here’s the formula:

Equity = Market Value of Home − Remaining Mortgage Balance

Why is Equity important?

Equity is a key component of your financial health and offers several advantages:

1. Home ownership: The more equity you have, the closer you are to owning your home outright.
2. Borrowing power: Lenders often allow you to borrow against your equity, giving you access to funds for renovations, investments, or other expenses.
3. Better loan terms: Higher equity can qualify you for better loan terms, such as lower interest rates and reduced mortgage insurance premiums.
4. Financial security: Building equity provides a safety net for future financial needs and increases your net worth.

How can you build Equity?

Building equity can be achieved through several methods:

1. Pay down your mortgage: Making regular mortgage payments reduces your loan balance, thereby increasing your equity.
2. Home improvements: Renovations and upgrades can increase your property’s market value, boosting your equity.
3. Market appreciation: As property values rise, your equity increases even if you don’t make extra payments.
4. Extra payments: Making additional payments towards your mortgage principal can significantly increase your equity over time.

How to use Equity to your advantage

Once you’ve built up substantial equity, you can use it in various ways:

1. Home equity loan: Borrow a lump sum against your equity, which you can use for large expenses like home renovations or debt consolidation.
2. Refinancing: Refinance your mortgage to access your equity at a lower interest rate, potentially lowering your monthly payments.
3. Investment opportunities: Use your equity to invest in additional properties or other investment opportunities, diversifying your portfolio and building wealth.

Risks to consider

While leveraging equity can be beneficial, it’s very important to be aware of the risks:

1. Increased debt: Borrowing against your equity increases your overall debt and monthly repayment obligations.
2. Market fluctuations: If property values decline, your equity could decrease, potentially leaving you with less financial flexibility.
3. Foreclosure risk: Failing to meet repayment terms on equity loans can result in foreclosure, putting your home at risk.

Conclusion

Equity is a powerful financial tool that can enhance your borrowing capacity and provide financial security. By understanding how equity works and how to build it, you can make informed decisions about your home loan and overall financial strategy. If you have more questions or need personalised advice, our team of expert mortgage brokers is here to help.

Contact us today to learn more about how you can leverage your home equity to achieve your financial goals!

The above is provided for informational purposes only and is not intended as financial or legal advice.