Unlocking your property’s potential by maximising home equity
Unlocking your property’s potential by maximising home equity
Your home is more than just where you live—it’s also a powerful financial asset. As you pay down your mortgage and your property’s value increases over time, you build equity. These gains can provide opportunities to fund renovations, invest in new ventures, or even consolidate debt. But before borrowing against your equity, it’s important to understand how it works and the key considerations involved.
In this blog, we’ll explore smart ways to use the equity in your property, the benefits and risks, and the crucial factors to weigh before making any big decisions.
Recap – total vs. useable equity
In a previous blog we covered the different forms of equity, the first being home equity: the margin between your home’s value and your mortgage balance. Then you have the amount you can actually leverage to make your next move, which we call useable equity. To find out more about how to calculate your useable equity, read on here.
Using your equity
Once you understand your financial position, it’s time to discover how you can potentially use your equity to your advantage – hopefully the exciting part!
1. Home renovations – whether you’re getting into some DIY or bringing in the experts, using your equity to update your home can be a savvy move for when you eventually come to sell, or just make your living situation more comfortable. Look for updates that will increase value – a new kitchen or bathroom often fits this bill, but you can seek advice on the best value-adds from a property expert such as a real estate agent.
2. Investment property - using your equity to purchase an investment property could be the first step in building your wealth. A rental property can generate consistent income, but success is dependant careful research of the right property to buy, ongoing property management and smart financing, which is where our Total team can assist.
3. Debt consolidation – tapping into your equity to consolidate your debt can be a strategic way to simplify your finances and potentially reduce your interest payments – just be wary of extending your repayment period, as you could end up paying more interest overtime.
4. Funding a business venture – if you’reready to start your entrepreneurial journey and become a business owner,accessing your equity can provide the deposit or capital you need to get going. However, start by weighing up the risk and reward, with a key risk being losing your home if you use it as collateral.
5. Helping your kids onto the property ladder– property ownership is a common goal for many Kiwis, but it can be tough to get your first step up. So as a parent, you can give your children a helping hand by leveraging your own property’s value to act as part or all of their deposit.
Key considerations before utilising your home’s value
While these actions all come with benefits, they also come with nuances and risks to consider before taking the leap. The first is that if you decide to use your equity to buy another property, you should check out the lending criteria and loan-to-value ratios (LVRs) you’ll need to work around. If you’re buying an investment property, your useable equity will need to equate to a 30% deposit to buy an existing property, or 10% if it’s a new build as they’re exempt from LVR restrictions. Another option available is to retain your existing property as a rental, where your LVR is maximum 70%, and purchase a new home to live in with a maximum LVR of 80% for an existing property, and 10% for a new build.
Secondly, if you’ve owned your home for a few years, you’ll know that interest rates go up and down alongside wider economic movements, soit’s important to allow some leeway in your budgeting. You want to avoid the situation where property values drop and you end up owing more than your property is worth. Depending on the way you choose to use your equity, youshould also consider the long-term costs you’re signing up for. Handily, we’ve detailed the costs associated with property ownership, particularly investment properties, in another blog.
In accessing your home’s useable equity, there is a risk of over-leveraging yourself, essentially borrowing too much against the property and straining your finances. Borrowing wisely, keeping your total debt manageable and maintaining a financial cushion is the best approach for mitigating this risk. In addition, consulting with a financial adviser is a sensible step, to make sure all your calculations stack up.
So while your home’s useable equity is a valuable financial tool that can unlock a range opportunities, leveraging it strategically is key. With some careful planning, research, and professional advice, you can make informed choices that strengthen your financial position rather than compromise it.