What does equity mean?
You have been building up equity in your property throughout the years without even realising. If you own a home with a value of $500,000, and you only have $200,000 left to pay, it means that your house equity is $300,000. As the years pass by, and you continue to pay off your loan, your equity is increasing.
You can also build up equity if the value of your home is getting higher. For example, if your $500,000 property has grown in value by 10 percent during the last year, it means that your equity is now $50,000 higher than it was 12 months ago, without taking into consideration the repayments you have done during the last year.
But if you want to access equity through your lender, your property will be evaluated by a certified valuer. He will calculate exactly how much your equity is, and the bank will consider his professional opinion, not yours.
How can you access your equity?
The equity of a property you own can be partially or entirely obtained. The most common way of accessing it is by refinancing the existing loan. However, you can opt for borrowing on your equity, too.
For example, if you are short of money, you can access your equity through the redraw facility. This means that you can practically use the money from any additional repayment you have already made. The condition is for those amounts of money to not be part of the minimum payments.
Australians tend to opt for mortgage refinancing, which allows them to borrow more money. In this situation, the bank will establish the value of usable equity as some of it will be kept back as security. You need to make sure you know exactly how much equity you will have before refinancing. If your lender valuation of the property is $500,000 and you have already paid $300,000, the value of the available equity is $300,000. But if the usable equity is only 80%, it means that you can use only $100,000.
Are there any risks?
The short answer is yes. As any other type of financial move, accessing your equity has both advantages and disadvantages. Even though equity is a useful funding option, you need to know that sometimes it will not meet your expectations. The market and financial field suffer changes all the time, and some of them may be simply omitted when doing your math. Financial experts advise you to consider a buffer of a substantial sum when you calculate the value of your property over the years. Continuing with the already mentioned example of a house worth $500,000, if you anticipate that its value is going to double in 7 years, you should consider a buffer of $150,000.