If you have a property owner, and have been for a number of years, there's a good chance that your property has appreciated in value throughout that time, which means you can access that newly created equity.
By tapping into equity you can use those funds to help pay for a renovation, which can then increase the property's value even further.
Equity is simply the amount of money that you have in the property. Equity is the value of the property minus any outstanding debt. If a property increases in value and the debt (mortgage) stays the same or falls, then you have had an increase in the equity in your property.
The first thing to take into consideration, before you think about accessing equity is that you often can't access all of it. Just like when you originally took out a home loan, the lender probably required you to put down a deposit - usually around 20 percent.
If you're going to access equity, you're going to need to ensure that you keep some money in the property to appease the lender.
How to Access Equity
The most common way to access the equity that has accumulated in your property is by refinancing and taking out a new home loan.
For example, if you purchased a property for $500,000 with a $100,000 deposit, and that property has no increased in value to $700,000, you've got $200,000 of additional equity that has been created.
When you refinance, it's like you're buying the house again and you would be required to put down a 20% deposit on the $700,000 value.
That means if you have to keep $140,000 on the property itself, you could potentially access the balance of the equity or $160,000 to fund a renovation.
While it is possible to refinance to an LVR of above 80 percent, you will likely be forced to pay Lenders Mortgage Insurance (LMI) which could cost you in the tens of thousands of dollars.
This type of refinancing to tap equity is normally used to fund smaller-scale renovations such as cosmetic renovations. Cosmetic renovations often include things like updating the kitchen and bathroom, as well as other small changes such as putting in new floors, and painting.
If you're looking at taking on a larger scale renovation such as adding another storey to the property, or adding new living areas or bedrooms, or knocking down walls, then equity may not be enough and you might need to look at taking out a construction loan.
When you get a construction loan, the maximum borrowing amount is based not on the property's current value, but on the predicted property value upon completion of the construction.
This means that you could potentially fund the renovation with a loan based on the improvements that you're looking to make. Which effectively gives you more equity to work with. While this is more involved, it might be an option if you don't have enough equity built up in the property itself.
Access Your Own Funds
If you have a loan product that includes a redraw facility or an offset account, this is another way that you could access funds to complete a renovation.
In the case of a redraw, you are simply withdrawing funds that you have paid on your mortgage, over and above the minimum payments required under the terms of the loan.
If you've been paying down your mortgage consistently over a period of time, this might be another option. Learn more about refinancing by reading our blog here.
A renovation is a great way to both add value to the property, but will also make it a nice place to live and more attractive to potential buyers if you choose to sell. By using your equity to fund a renovation project, you are using the value within the property to boost that value further.