How to fund your home improvements with equity

Are you considering making home improvements and renovating your property? You’re certainly not alone, and it may be worth exploring how your home equity could assist you in this process.

With Australians spending more time at home over the past couple of years thanks to pandemic-related restrictions, our desire to make home improvements and renovate has skyrocketed. Research from RateCity earlier this year found that more than 1 in 3 homeowners planned to alter or renovate their home in 2021.

And it’s no surprise when you consider how much time Australians have spent inside, paired with some people being able to grow their savings by having travel and other expenses restricted. That is a lot of time to sit and daydream about how you could improve your surroundings.

If you’re fantasising about adding another storey, an extra bathroom, or that home office that you now need, you may want to consider how you might be able to make use of your home’s equity. Home renovations have the potential to not only upgrade your living conditions, but also potentially increase your property’s value in the long term.

What is home equity?

If you’ve been repaying your mortgage (principal and interest) for several years now, and prices in your area have gone up, you may have built up some equity in your home.

Home equity is the difference between the current market value of your property and the remaining balance on your home loan.

For example, if you had $350,000 owing on your home loan and the value of your property was currently $500,000, the difference of $150,000 would be your home equity.

However, not all your equity is available to be borrowed against. Your lender will want to keep at least 20% of your equity unencumbered so your Loan-to-Value Ratio (LVR) stays under 80%. This also prevents you having to pay Lender’s Mortgage Insurance (LMI).

Lenders will calculate your usable equity, which is worked out based on 80% of your property’s current value, minus the amount you owe the lender. In the previous example, 80% of the property value ($400,000) minus the $350,000 owing on the mortgage would leave you with $50,000 in usable equity.

You can try out some simple calculators online, like Westpac’s Home Equity Calculator, which estimates your property’s market value, then assesses your current loan balance to find your potential usable equity amount.

Some homeowners may be surprised by how much equity they have in their home, with RateCity research also showing that millions of Australian homeowners may have amassed considerable equity in recent years.

Using equity to boost your property value

There are an endless number of improvements you may make to your home that could not only make it more liveable, but potentially increase the property’s value as well.

Here are some of the most popular home improvement options to boost your property’s value:

• Upgrade your kitchen or bathroom

If your home is still rocking a decades-old design for the kitchen or bathroom, it may be time to consider modernising. Not only can you incorporate a more appealing aesthetic design by renovating, you could potentially also upgrade your plumbing and hardware to make it more energy and water efficient, as well as more sustainable.

• Storage

Another common occurrence in older homes is limited storage options. By renovating to add storage, such as through built-in wardrobes in bedrooms, increased cabinet space in the kitchen, or even a backyard shed, you may further increase your property’s value.

• Heating and cooling

Whether you’re considering double-glazed windows, installing outdoor blinds and awnings, or tossing up between ducted air-conditioning and split systems, improving the thermal performance of a property is a must for any Australian home.

• A home office

With more people now having the freedom to work from home as they choose, home offices are more in demand than ever before. Having a more permanent solution for working from home, which is private and includes natural lighting could add real value to your property and attract new buyers.

Things to remember when accessing your home equity

It’s important to remember that home equity is measured against market performance. This means that while you could see positive equity growth when the housing market is performing well, equally you could see your available equity decrease should the market drop.

For those thinking about accessing home equity to fund renovations, another factor to consider is overcapitalisation. Overcapitalisation occurs when you spend more on renovations than the value it adds to your property.

For example, if your home is valued at $750,000 and you invest $150,000 on renovations, but the value of your home only increases by $100,000 after renovations, then you would have overcapitalised by $50,000.

While property prices can fluctuate and this could change over time, it’s important to do your research and consider market trends before accessing your equity for renovations. Consider speaking to a qualified surveyor who could help to give you an indication of how much increased value you could expect from your renovation.

Finally, always remember that when accessing equity, you are essentially taking out an additional loan and borrowing more money – which will result in larger repayments with interest charged on funds borrowed. While you might be able to afford repayments today, it’s important to also consider your future financial situation and what impact any movement in interest rates could have on your budget.

• So, thinking about renovating your home? Discover more about accessing home equity and other ways you could fund your renovations plans with Westpac today.

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