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What is equity and how do you use it to your advantage?

By Michael Walkden

FAQ: WHAT IS EQUITY AND HOW DO YOU USE IT TO YOUR ADVANTAGE?

When it comes to property investment, there are many ways to approach the buying process. The most direct way to purchase a piece of real estate is with the use of a home loan, which will typically require you to put down a deposit.

In New Zealand, the Reserve Bank has enforced new restrictions that mean that investors will have to commit at least 30 per cent as a deposit if they’re buying real estate in Auckland, though it’s possible for some to bend this threshold. ABC Mortgages reveals that in Australia, this figure is usually 5 per cent.

Alternatively, you can leverage the value of your current home and use it in place of a deposit instead. This is how you make use of equity and is a great way to fast-track your investment strategy, skipping the need to save up for another home loan.

HOW DO YOU GATHER EQUITY?

Equity is the value of your property minus what you still owe on it. Let’s say you’ve got $300,000 left to pay off on your house that’s worth $500,000. This means you have $200,000 in home equity. The beauty is that real estate increases in value over time, which means that the longer you hold on to it, the more your equity grows.

HOW DO I USE THIS?

You can unlock the equity in your home by utilising it through home-equity loans. These can be used for a variety of purposes from buying a car, to building a deck, to buying an investment property. As Loan Market describes, in the latter example, you will typically be limited to borrowing up to 80 per cent of the property’s value, even if you do own your home outright.

IS THERE A QUICKER WAY TO INCREASE EQUITY?

Absolutely. Some people can take things into their hands and force up the market value of their home. This is called manufactured equity.

Applying renovations is one way to do this which, in turn, will give a nice bump up to your equity. Big projects like giving the kitchen a makeover or building a new bedroom, as well as smaller efforts like giving the living room a new lick of paint will all contribute to this.

When buying real estate in Australia or New Zealand, it’s a good way to get a bigger kick off into the next stage of your investment strategy.

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