After buying your home, you’ve spent the last three years diligently paying off your loan. You’ve also been preparing your meals, patiently, from a kitchen designed in the 60's; never entirely sure if the splashback tiles are dirty or not because of their brown and orange hue.
Now is your time.
If your home has gone up in value, the amount of equity you have in that property will have gone up too. Equity is the difference between the money you owe on your home (what’s left on your home loan) and the value of your property.
Property value – debt = equity
For example, if your home is worth $600,000, and you have $300,000 left on your home loan, your equity is $300,000. But that doesn’t mean you’ll be able to withdraw that $300K as easily as you’d withdraw cash from an ATM (side question: does anyone still use ATM’s?). It does mean, though, you can refinance your home loan to bump up your loan amount, which will give you some cash to spend on renovations.
How does it work?
Equity matters to you, loan to value ratio (LVR) matters to your lender. Your lender will want to make sure you have a maximum 80% LVR, which means they’re not lending you more than 80% of the value of your property. Now that your property value has increased, your LVR has decreased.
When you originally bought the house for, say, $500,000, you had a $100,000 deposit ($400,000 loan amount) so your LVR was 80%.
Loan amount ($400K) % property value ($500k) = 80% LVR.
Now three years later, your home is worth $600,000. Plus, you’ve also paid a chunk of your home loan off in that time too. So now with only $300,000 owing, your LVR has dropped to 50%. That’s good.
Loan amount ($300K) % property value ($600K) = 50% LVR
This means you can bump up your loan amount so that your LVR is back up to 80%, and you can use that ‘credit’ for your renovations. 80% of the value of your property is $480,000, so you will be able to borrow $180,000 more, and have that money available to you (so you can pay the people responsible for your kitchen makeover).
Loan amount ($480K) % property value ($600K) = 80% LVR.
Maximum loan amount ($480K) – existing loan amount ($300K) = borrowable equity ($180K)
The most common loan structure for accessing home equity, is to have an offset account. Once you have the $180,000 available to you on your loan, you can put it in your offset account so it’s there as you need it. And you won’t pay interest, until you start making the withdraws to pay your tiler.
How do I go about doing it?
The first thing to do would be to speak with your existing lender to discuss your options. They’ll value the property, work out how much borrowable equity can be released (the $180K) and do the sums to see whether you can afford to meet the higher loan repayments that will come from a bigger loan. You should certainly look at other home loan options too – this could be a chance to not only bump up your loan amount, but get a better deal on your interest rate.
Then it’s time for the standard home loan application process: completing forms, signing documents and waiting. Unfortunately.
Quick tips and tools.
- Work out how much equity you may have by getting a valuation done (your real estate agent will probably do this for you for free).
- Work out your maximum loan amount, which is 80% of the value of your property.
- The difference between what you currently owe, and that maximum loan amount, is how much you may be able to access for your renovation.
- Work out if you can afford a bigger loan, use a borrowing calculator.
- Head to Pinterest for kitchenspiration (warning: large chunks of time will be lost).