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First Home Buyer Guidance
Step by step help with grants, finance and floor plans, move into your first home sooner.
Equity represents the positive difference between the value of your home and the remaining loan balance.
Initially, your equity will be limited when you first purchase a home. For example, if you buy a house and land package for $800,000, using a $150,000 deposit from your savings and taking out a $650,000 loan, your equity at settlement would be $150,000 ($800,000 – $650,000).
Over five years, maintaining a disciplined budget and making extra mortgage payments reduces your loan principal by $150,000, bringing your remaining loan balance to $500,000. During this time, your property appreciates in value. Assuming an average annual growth rate of 6.8% over 25 years, your home’s value could reach around $1,100,000. At this point, your equity would have grown to $600,000 ($1,100,000 – $500,000).
As you continue to own the property, your equity will keep increasing. Additionally, there are ways to access this growing equity, such as:
First-time homebuyers get a lot of focus in financial guidance, and for good reason. Once you’ve overcome that challenge, achieving your next property goal becomes much simpler. When you sell your home, you’ll benefit from the rise in its value, easing the strain on your finances and giving you a boost toward affording your next property.
Are you dreaming of owning a holiday home or upgrading to a more spacious family home while keeping your current property as a rental? Utilizing your equity could make this achievable without needing to save for a new deposit. If you’ve built up enough equity, the bank may allow you to use it as security for your new property.
There are a few different approaches. Let’s revisit our earlier example. After five years of owning your home, you now have $600,000 in equity and owe $500,000 to the bank. You’re looking to purchase a bigger home that costs $1.1M while keeping your current property.
The bank will assess two key things. First is the loan-to-value ratio (LVR) across both properties. This means they’ll check whether your deposit or equity covers at least 20% of the total value. In this case, your current home is worth $800,000, and your new home is valued at $1.1M, for a combined total of $1.9M. With $600,000 in equity, you comfortably surpass the 20% benchmark that most lenders look for.
However, you’ll still need to show that you can manage mortgage repayments on both properties, so loan approval isn’t guaranteed. Still, avoiding the need for a new deposit is a major advantage. Plus, the rental income from your current property will be included in your overall income, helping improve your loan serviceability.
Refinancing is attractive for two main reasons. First, it allows you to secure a more favorable mortgage rate. Second, it enables you to leverage your equity for home improvements or extensions.
Securing a better mortgage deal could be as straightforward as eliminating lenders’ mortgage insurance (LMI) once your equity hits 20%. If you purchased your home with a smaller deposit, you’re likely paying LMI and might have accepted a higher loan rate than desired. As your equity increases, you become a lower-risk borrower and may qualify for improved rates.
Depending on your age and situation, you might also have the opportunity to ‘restart the clock’ with a new 30-year loan. This would extend your remaining payments over a longer duration, reducing your monthly financial obligation.
Furthermore, certain loan products are exclusively available to borrowers who wish to borrow 60% or less of their home’s value. These options typically come with lower interest rates, so if you qualify for one, it’s definitely worth considering.
If you’re considering selling your property, it might be wise to think about a renovation beforehand. Upgrading your kitchen or bathroom, or even adding a rear extension, can significantly increase your selling price, providing a better foundation for your dream home.
You can tap into your equity to finance the renovation. A mortgage broker can assist you in figuring out how much you might be able to borrow.
You have the option to either stay with your current lender or switch to a new one. If you have a fixed-rate loan, be aware that there will be a break fee if you exit before the end of the fixed term. Discuss the best choice with your mortgage broker.
Regardless of the reason for refinancing, specific requirements must be met. You’ll need to submit various documents to the bank, such as payslips and bank statements. A property valuation will also be part of the procedure.
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