Build Your Wealth with a Simple Guide to Using Your Home Equity

Building wealth requires adopting the right mindset and being strategic when using available financial instruments. Essentially, it’s about making your money work in your favour. But what if you don’t have enough cash to start creating wealth? There’s an underutilised strategy that we want to share with you, and that is leveraging your home’s equity—the part of your home you fully own and can access as needed.

So, what is home equity?

Home equity represents the difference between your home’s current market value and the outstanding balance on your mortgage. Think of it as the ownership stake you already have in your property. As you diligently pay down your mortgage and as your property value appreciates over time, your equity steadily grows, too.

To determine how much equity you have, you’ll need to know your home’s current market value. Start by exploring online valuation tools, consulting with a local real estate agent for a market analysis, or commissioning a professional appraisal. Once you have a reliable estimate of your home’s value, simply subtract the remaining balance on your mortgage. The result is your home equity—the amount you can potentially leverage. But how can you access or leverage your usable equity?

Here are some popular methods that can help you use your home equity:

• Home Equity Loans

Also known as second mortgages, home equity loans provide a lump sum of cash secured by your home equity. You repay the loan over a fixed term with a fixed interest rate, offering predictability and stability. A home equity loan is well-suited for financing significant, one-time expenses, such as major home renovations, debt consolidation, or even starting a business.

• Home Equity Lines of Credit (HELOCs) 

A HELOC functions as a revolving line of credit, allowing you to borrow funds as needed up to a predetermined credit limit. You only pay interest on the amount you borrow, providing flexibility for ongoing expenses or projects with uncertain costs. This makes HELOCs a popular choice for home improvements, unexpected expenses, or bridging the gap while pursuing other financial opportunities.

• Cash-Out Refinancing

This strategy involves replacing your existing mortgage with a new, larger loan, pocketing the difference between the new loan amount and your existing mortgage balance in cash. While it can be an effective way to access equity, carefully consider the interest rate on the new loan compared to your existing mortgage. Timing matters, too. With the recent RBA interest rate cuts, now’s a good time to consider cash-out refinancing to pay lower mortgages and access equity. 

Once you’ve unlocked your home equity, the key is to deploy it strategically to maximise wealth creation. Scroll down to learn more about the best strategies. 

Start or grow a business.

Using your home equity may provide access to capital at potentially lower interest rates than traditional business loans. But before proceeding, it’s crucial to develop a robust business plan that outlines projected cash flow, break-even points, and market analysis. Also, just take your home equity as one of your funding sources; it’s best to diversify your funding sources to mitigate risk and ensure clear boundaries between personal and business finances. Explore the tax implications, too, as interest on home equity loans used for business purposes may be tax-deductible.

Buy an investment property to build more equity.

Leveraging your home equity to invest in real estate can significantly accelerate wealth building. This strategy allows you to purchase a second property without needing to save up a large cash deposit. As a result, you can grow your property portfolio faster. When investing in real estate, consider the following tips: 

• Research local markets thoroughly to identify areas with strong rental demand and potential for capital growth. For instance, Tasmania is a great choice beyond traditional real estate hotspots. Tasmanian suburbs now capture many investors’ attention for their impressive growth & potential.
• Consider property management costs for rental properties and understand the tax implications of owning multiple properties. Being prepared for periods of vacancy in rental properties, especially holiday rentals, is also important. 
• Starting with a duplex or small multi-unit property can provide diversified income streams and help you scale your portfolio more effectively.

Invest in home improvements.

Strategic home improvements can increase your property’s value, building even more equity and making it more profitable when you sell it in the future. Just make sure to focus on projects with high returns on investment, such as kitchen remodels, which typically return 70-80% of their cost, and bathroom upgrades, which can yield a 60-70% return. Energy-efficient improvements like new windows or insulation are great options, too, since they can lower bills and boost home value. Learn the trends to determine the most appealing home features to potential buyers in your area.

Pay off high-interest debts.

Using home equity to consolidate high-interest debts can save money, improve your financial health and kickstart other wealth-building strategies. Begin by calculating the potential savings and create a plan to avoid accumulating new high-interest debt. Then, consider closing credit card accounts after paying them off to resist temptation. You can use the money saved on interest to build an emergency fund or invest in a business or property. Be aware that you’re converting unsecured debt to secured debt, so ensure you have a solid repayment plan.

Invest in the stock market.

While this strategy carries risks, it can potentially yield higher returns than the interest you pay on the equity loan. To mitigate risk, diversify your investments to spread exposure across different asset classes. For instance, you should consider low-cost index funds for broad market exposure. Also, be prepared for market volatility and maintain a long-term perspective. Consulting with a financial advisor can help you gain insights and advice tailored to your financial goals and risk profile.

Build your emergency fund.

A robust emergency fund provides financial security and peace of mind. Use the cash from refinancing or a home equity loan to build your emergency fund. Aim for three to six months of living expenses and keep the fund in a high-yield savings account for easy access and growth. Regularly review and adjust your fund as your circumstances change. More importantly, use the fund only for true emergencies, not discretionary expenses, and replenish it as soon as possible after using it.

Fund your retirement.

Using home equity can supplement retirement savings, especially if you’re behind on contributions. Consider this option if you’re nearing retirement and need to boost your savings. More specifically, explore catch-up contributions to retirement accounts if you’re over 50. Just be sure to understand its full impact on your home’s value and estate planning. Downsizing in retirement can also free up more equity.

Fund your education.

Investing in yourself can increase your earning potential. Research the potential return on investment of different educational programs and consider fields with high demand and strong salary prospects. If possible, look into online or part-time programs that allow you to continue working while studying. You can also explore employer tuition reimbursement programs and scholarships to supplement your funding. This type of investment strategy may not have immediate results, but it can lead to higher income and greater financial stability over time.

Summing it up.

While these strategies can help build wealth, they also come with risks. Your home serves as collateral for home equity loans, HELOCs, or refinancing, so it’s crucial to have a solid repayment plan. Always consult a financial advisor or mortgage broker to ensure these strategies align with your financial goals and risk tolerance.

Want to learn more about using your home equity? Don’t hesitate to give us a call. Our seasoned mortgage brokers can help you access the best home loan equity rates once you decide to refinance and start building your wealth with equity.