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What is equity?

If you have a home loan and have been paying it off for a while or the property market values have increased in your area, you may have created some equity in your home.  Mortgage Broker Kim Gallie explains what equity is and how it could benefit you...

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What is it and how can I use it…
Equity is the difference between the value of your property and the amount that is owed on it.

For example, a home worth $800,000 with a mortgage of $350,000 has $450,000 in equity. However, you can only borrow up to 80% against your home, that being $640,000 in this case.  Once your current loan balance is deducted from this, it leaves you with $290,000 available equity, which you can use. 

You can use your equity to buy a car or go on a holiday or….

How can you use your equity to purchase another property?
One way to use your equity is for a down payment on an investment property.  If you already own a property and want to purchase an investment property but don’t have a deposit, the lender can use the equity that you have in your current home as a deposit for the new loan.

Similarly, if you’re looking to build a property portfolio, this too can be done through the use of equity. Once you have built up equity in your first property you can then look to use that equity to purchase another property and so on. You are leveraging from the wealth you already have, to build up more.  At the moment, Investors are usually able to use up to 80% of their home equity and up to 60% on an investment property.

Please keep in mind that the way your home loans are structured can have an impact on the use of your equity. For example, if you have set up your loan on a fixed-term interest rate and want to refinance, you could be penalised for costs such as early-exit fees, which can leave you thousands of dollars out of pocket.

As everyone’s financial situation is different, it pays to speak to an adviser who can help you structure your loan to suit your financial plans and tap into your equity in the future. Considering different lenders will give you access to more options which could offer you a better service or interest rates than the one your current lender has.

Of course, this is just one side of the equation for lenders, you also need to be able to afford to borrow more money, but that’s a whole other article!

Would you like see how this could work for you?
Get in touch today for a complimentary consultation on 09 306 5829
Kim Gallie | kim@wealthworks.co.nz 

 
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