How to Build and Increase Equity in Your Home

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.

There are two avenues to beef up your home equity:

Within both, there are multiple strategies to consider.

If you want to increase the value of your home

Renovations

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.

However, be cautious about spending too much on things that may not add significant value, such as installing expensive granite or marble kitchen benchtops in a $300,000 property. Avoid "over-capitalising" by overspending on upgrades that don’t align with your property's value.

Market appreciation

hen 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.

While most real estate appreciates over time, this isn’t guaranteed, and some markets may experience stagnation or downturns, especially after booms or during economic downturns.

If you want to 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.

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.

Consider refinancing

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. Just be mindful, however, that refinancing can sometimes come with fees, so it’s important to consider the overall savings before proceeding.

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.