Almost 80 per cent of Australian home owners believe the equity in their home can be used as part of their retirement plan, according to research commissioned by Westpac.
The ‘Home Ownership Report’ was conducted by Lonergan Research in September 2015. It surveyed 1115 Australian home owners with home loans (AHHL) and shows that more than three quarters of AHHLs have equity in their current property.
The results also show AHHLs most commonly consider using home equity to invest back into property.
So, what exactly is equity, how do you establish it and what are the best ways to use equity in your home? We ask Westpac group head of home ownership Chris Screen for some suggestions, and this is what he says…
What is equity (in terms of property ownership)?
Screen says equity is the difference between the market value of your property and the amount owing on your home loan. A quick and easy way to find out how much equity you have is by using an online calculator, such as Westpac’s equity calculator.
“According to Westpac research, more than half of Australians with a home loan aren’t entirely sure what equity is, with most believing it is the amount paid off their home loan. This means many of them could be missing out on opportunities from leveraging the equity in their home – such as buying an investment property, renovating or upgrading the family home, and building wealth” says Screen.
“Online banking technology such as Westpac Wonder, allows customers to receive an estimated value of their property, access the amount of equity in their current home loan and compare the cost of using equity against taking out another loan. It also suggests options for properties they could afford based on their pre-determined property preferences and financial situation,” he says.
How do you establish equity?
Screen says: “Home equity takes into account both the repayments made to your home loan and the market value of your property. So over time, if the value of your property increases and you continue to make regular repayments, your home equity is also likely to increase.”
There are various ways to build equity, Screen says. “For example, renovating can increase the value of your home and thereby increase your equity.” You could also boost equity by increasing the frequency and/or size of your loan repayments, he says.
Common ways to use equity
1. Wealth creation
Almost four in five Australian home owners agree the equity in their home can be used to help fund their retirement.
Equity can be used as leverage to buy more property. Leverage is a concept of using the equity generated by the rising value of an existing property to purchase a new one. This property then grows in value, allowing the investor to repeat the process and buy again.
Westpac’s latest Home Ownership Report shows Australian home owners with a home loan most commonly consider using equity to invest back into property – with investing in another property most likely (40 per cent), followed by renovating or extending their home (36 per cent), and upgrading their property (32 per cent).
Screen says renovating can increase the value of a property – a view supported by many housing industry experts. With 39 per cent of AHHLs more likely to consider renovating their home, it’s a prospect agreeable to home owners too.
The study also shows AHHLs believe renovating the kitchen (44 per cent) and bathroom (41 per cent) will have the “greatest impact on their property’s saleability”.
More than one-third (35 per cent) of AHHLs believe landscaping will increase the value of their property.
Screen says: “We also encourage people looking to tap into their home equity, to conduct thorough research before taking out any home loan or financing products. It’s important to understand any fees, as well as the terms and conditions associated with a product.”
“Before considering this option, we recommend people speak to their local bank manager or financial expert to ensure any advice suits their circumstances,” he says.
* Lonergan Research was carried out in accordance with the IOS 20252 standard.