Owning real estate allows you to build wealth, and every homeowner should aspire to increase their home equity, given the size and the timeline of the financial commitment involved.
To this end, there are two ways to beef up your home equity:
What is home equity? Home equity is the part of your property you own outright — the property’s value minus the amount still owing.
Increase the value of your home
The most obvious way of increasing the value is to make improvements through renovations and/or extensions. Done wisely, renovations can greatly impact your property’s value, as long as you’re not over-capitalising, or overspending on things that may not add intrinsic value, such as granite or marble kitchen benchtops in a $300,000 property, for example.
Then there’s market appreciation, where the property’s value increases, thanks to favourable market circumstances. Most real estate does appreciate over time, although there are never any guarantees of future growth. Markets can go for long periods without moving or may even go backwards in the short term if there’s an economic downturn or if you bought into a boom and the overall short-term trend in the market is relative gloom.
Reduce your mortgage
Another way to increase home equity is to reduce your mortgage. There are several strategies you may want to consider, all of which involve increasing your fortnightly or monthly repayments.
Make a ‘coffee payment’
One that should be relatively easy to achieve is the so-called ‘coffee payment’ where you put the $5 a day you might otherwise spend on your daily takeaway coffee, which equates to about $150 a month, towards your mortgage repayments. It might not sound like much but you’d be surprised at what a difference it could make over the life of a 20- or 30-year mortgage. You can apply this strategy to any amount you feel comfortable adding to your current repayments that doesn’t stretch your budget too thinly.
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Use windfall money
Another strategy is to use any ‘windfall’ money, such as a tax return, a bonus or an inheritance, to pay down the mortgage further. Paying a few thousand dollars directly now could save a lot over the long run.
Alternatively, you may look at refinancing by reducing the term of your mortgage, say from 30 to 20 years, once you’ve done the calculations and determined you can afford the extra payments. Taking years off your mortgage means saving thousands of dollars in the long run.
Earn some income off of your property
Last but not least, you may want to consider deriving some income from your property by using services such as Airbnb to rent out a spare room or maybe even rent out your entire home when you’re away for a week or two. An extra few hundred dollars a week or even a month will also have a big impact over the life of your mortgage.
Whatever you decide, there are plenty of ways to build home equity, using combinations of value appreciation and debt reduction. It’s always a good idea to talk to your lender or an independent financial adviser to ascertain what’s best for you.
A loan-to-value ratio, or LVR, compares the home loan amount to the appraised value of a home. LVR ratios are evaluated when buying or selling a home, renewing or refinancing a mortgage, and when getting a home equity loan.