How equity works and how it helps fund your next home

Home equity is one of the most valuable financial benefits of owning property. As you pay down your home loan and your property value increases, you begin to build equity in your home. This equity can sometimes be unlocked and used to support your next step, whether that means renovating, upgrading your current home, or purchasing an investment property.

Understanding how home equity works, how it is calculated, and how lenders assess it can help you make more informed decisions about when and how to use the equity in your home.

What is home equity and how is it calculated?

Home equity refers to the difference between the market value of your home and the amount you still owe on your home loan. It represents the portion of your property that belongs to you, rather than the lender. Put simply, equity is the difference between what your home is worth and what you owe on it.

Equity in the house builds gradually over time through two main factors: paying down your loan balance and increases in the value of your property. As you make repayments, the amount you owe reduces. At the same time, if property prices rise, the value of your home may increase, which can also grow your equity position.

To calculate equity in your home, you can use a simple formula:

Equity = current property value – outstanding home loan balance

Let’s say you’ve bought a $600,000 house and land package, using $100,000 from your savings as a deposit and taking out a $500,000 loan. At the time of settlement, your property is usually valued at the amount you paid, which is $600,000. Your equity is $100,000: $600,000 minus the $500,000 you owe.

Fast forward five years. By sticking to a budget and paying extra towards the mortgage, you’ve managed to pay another $100,000 off the principal of the loan. You now owe $400,000. In the same time period, your property has increased in value. Using the average growth rate of 6.8% per year over the past 25 years, we can assume your property will be worth around $850,000. 

Your equity is now $450,000: $850,000-$400,000.

For homeowners looking to renovate, upgrade, or invest, equity in your home can become an important financial resource over time, especially as your loan decreases and your property value grows.

How can you access your equity to fund your next move?

Equity in your home can provide flexibility when you are planning your next move, whether that means upgrading, renovating, or purchasing an investment property. Accessing equity usually involves borrowing against the value you have built up, and the approach depends on your home loan structure and lender requirements.

Common ways homeowners may use the equity in their home include:

1. Refinancing your home loan – This involves replacing your existing loan with a new one, potentially allowing you to borrow against your equity.
2. Using a redraw facility – If you have made extra repayments, some home loans allow you to withdraw those funds for approved purposes.
3. Applying for a line of credit – Some lenders offer flexible loan products that allow homeowners to access equity as needed.
4. Using equity to fund a renovation or purchase – Equity can sometimes help fund home improvements or contribute towards an investment property deposit.

Because equity access increases your overall loan balance, lenders will assess your income, existing debt, and ability to manage repayments before approving any additional borrowing.

What can you use your equity for?

Home equity can be used in several ways, depending on your lender, loan structure, and financial profile. Common reasons homeowners use the equity in their home include:

• Funding a renovation to update or extend your current home
• Contributing to a deposit for a second home or next purchase
• Buying an investment property, including covering upfront costs such as a deposit and fees
• Debt consolidation, where appropriate, to simplify multiple repayments into one loan
• Strategic improvements that may increase the value of your property over time
• Accessing funds for major life costs, while keeping repayments manageable within your home loan

What should you consider before tapping into your equity?

Tapping into equity in your home can help fund a renovation, upgrade, or investment property purchase, but it also increases the amount you owe on your home loan. Before you borrow against your equity, it is important to weigh up the longer-term costs and risks.

Some considerations include the following:

1. Your loan-to-value ratio (LVR) – Most lenders set limits on how much equity can be accessed, often requiring you to keep a portion of equity in the property as a buffer.
2. Lender serviceability checks – Even if you have built strong equity in the house, lenders will still assess your income, existing debt, and living expenses to ensure repayments remain affordable.
3. Higher repayments over time – Using the equity in your home usually means a larger loan balance, which can increase monthly repayments and total interest costs.
4. Interest rate changes and market conditions – If interest rates rise or property prices fluctuate, the cost of borrowing against equity may change.
5. Personal circumstances and financial goals – Equity can be a useful tool, but it works best when aligned with clear goals and a repayment plan that suits your situation.

Ready to make your equity work for you?

Whether you are planning to renovate, upgrade, or explore your next home purchase, equity in your home can play an important role in funding your future goals. Carlisle Homes can help you assess your options and find a home design that suits your lifestyle and budget. Contact our team today to take the next step with confidence.