Equity is a simple concept which many people find confusing. Ask three different people to define equity and you’ll most likely get three different answers. In simple terms, equity is the value of your home minus any amount owing. For example, if your home is worth $1 million and you owe $200,000, the equity is $800,000. Equity can be increased in two ways viz: by the value of your home increasing from capital growth and/or by you reducing the amount owed. The best way is for you to repay your home loan as quickly as possible with capital growth being treated as a bonus. You can’t control capital growth but you can control how quickly you repay your loan.
Equity is very important as it can be used to create wealth or to buy an investment property for example. If you have plenty of equity, it is possible to borrow 100% of the purchase price plus the upfront costs. See below:
|Property Value||Loan amount|
|New home||$500,000||$525,000 (purchase price plus costs)|
Loan to valuation ratio is only 48% (Total loan amount divided by total property value) so even though you are borrowing 100% of the purchase price plus the upfront costs, you are only borrowing 48% overall so the bank is happy because there is plenty of equity available.
To see how equity can work for you, please call us to discuss.