When you own your own home, and you need to upsize, the question of equity is important. Equity is the portion of the property’s value that you own, as distinct from the portion that you owe the lender. If you have a $500,000 property, and a $400,000 mortgage, you have $100,000 equity, or 20 per cent equity. In standard mortgages, your lender will only lend to 80 per cent of the value of the property, meaning you must have at least 20 per cent. Your equity grows by you putting extra payments into the mortgage, and through capital growth, so that after a few years your mortgage balance may be at $380,000 and the property is worth $600,000. Because your lender will only have 80 per cent exposure in your property, the mortgage could be refinanced to $480,000, and having repaid the original mortgage with this new mortgage, you are left with $100,000, which forms part of the deposit you need to upscale your house. This is the power of equity in your property.
In order to use your current property to buy a large one, you need to build equity. In the above scenario, you build equity by repaying more into the mortgage than the lender has scheduled; and having bought well, you experience capital growth in the value of the property. But you also need the right products.
Principal & Interest: P&I loans are available in YBR Rate Smasher and Empower home loans. With P&I loans, your repayments pay-down the principal amount as well as the interest amount. You increase your equity if you’re allowed to make extra repayments into a P&I mortgage…
Extra repayments: not all home loans allow extra repayments. In YBR Rate Smasher and Empower home loans you can make extra repayments into the loan account, either by increasing your regular repayment amount or by putting in your lump sum windfalls (eg. tax refunds, work bonuses).
A powerful way of reducing the interest in a P&I loan, and boosting equity, is to use an offset account, one of the features of the YBR Empower Package home loan. The offset account is linked to the mortgage and any balance that is in the offset account reduces the loan balance by the same amount, for the time that it is in the offset account. When two income earners in a household put all of their earnings into an offset account the reduction in interest-paid is significant and equity is quickly built.
Using the equity
Having built equity in your property – from extra repayments and capital growth – you need the right strategy and financial products to make use of your increasing wealth, and buy a larger home.
Advice: When attempting to turn the wealth in one home into a large house, you might need some advice about the best way to go about it. There are issues such as valuations and perhaps finding a lender who will refinance your current mortgage with a higher LVR. Speak with a YBR Mortgage Broker to ensure you have the right strategy and the right loan products to achieve your goals.
Redraw: Having a redraw facility on your home loan – as your do in YBR Rate Smasher and Empower loans – means if your extra repayments have been large, you can redraw the extra repayments as cash and use them as a deposit or stamp duty etc. on your new home.
Line of credit: On a YBR Empower Line of Credit Loan home loan, you can arrange a line of credit against the equity in your property. A line of credit operates like an overdraft: you are given an amount you can draw-down to, and you pay it off as fast as you like. Lines of credit are very flexible finance facilities for people with good equity who want to buy a large home: you just draw-down what you need for your deposit.
Interest rate: When upgrading to a new home, probably with a larger mortgage, ensure you are always paying the best interest rate. YBR Rate Smasher and Empower home loans have some of the lowest interest rates in the Australian mortgage market, and by paying a low interest rate you save thousands over the life of a loan.