With the housing market in Australia incrementally on the rise, many property owners are seeking out ways to capitalise on this opportunity. One way that these homeowners reap the gains of a growing housing market is through the direct appreciation of their property.
Over time, the value of the property tends to grow based on several historical and economic factors. Equity also builds as you pay off the property’s mortgage. In turn, these two variables at play increase your capital, specifically your home equity. This capital growth can be beneficial for a variety of reasons.
If you own a home or other piece of real estate and want to grow your wealth without selling it outright, you’re in the right place. Home equity can be a great enabler for people to strike on financial opportunities and provide better security for you and your family.
Read on to find out ways in which you can leverage property ownership and put yourself in a more stable position. Let’s jump right into it!
The Connection Between Rising Property Prices and Home Equity
The connection between property prices and home equity is fairly intuitive and straightforward to comprehend. The core concept is simple: as property prices go up, the average homeowner’s home equity increases alongside them.
So what causes this price increase?
Firstly, it’s important to recognise the fact that Australian property prices tend to rise over time due to basic economic principles. This is especially true in high-cost-of-living areas and urban sprawls, primarily in regions like New South Wales and Victoria, where bustling metropolitan cities like Sydney and Melbourne contribute heavily to the country’s overall economy.
Given the economic importance of these cities on both a national and global scale, many Australian citizens and overseas migrants compete for housing with good value propositions within these regions. With a great demand for housing and a fairly limited supply, property prices naturally trend upwards as buyers scoop up the more affordable houses in the market.
For homeowners and property investors, this presents an opportunity for them to capitalise on their home and other property holdings. This still applies to homeowners with an existing mortgage, as their interest rates are locked in at the time of agreement rather than fluctuating with current market rates.
So, to reiterate, rising property prices contribute to property holders’ equity growth as increasing market demand and rising average housing market value also give a lift to their own property prices in the background. This, in turn, helps homeowners build wealth passively and potentially leverage their property for future opportunities.
Want to know where you stand financially? You can work out how much equity you’ve built up using online tools like a home equity calculator to figure out your own personal circumstances.
Should You Build Home Equity? 6 Benefits of Building Home Equity
Yes. If you are a homeowner, building home equity can benefit you in several ways. This is regardless of whether you have fully paid your mortgage or are currently still working towards paying it off.
As your equity grows, so does your financial flexibility and overall net worth. This increased flexibility can bring forth a lot of opportunities that can help you in your financial journey, such as:
- Access to funding: Equity can be leveraged for loan and refinancing applications.
- Investment: If you plan to resell the property, you can use the money to fund other income-generating assets.
- Improved borrowing power: Higher equity strengthens your position with lenders.
- Lower interest rates: When applying for new loans, you can get better rates as interest charges are reduced because of your high home equity.
- Financial safety net: As a last resort, home equity can provide a buffer during emergencies or unexpected costs.
- Supports long-term wealth generation: Having a solid home equity figure ensures that you have a high personal net worth. This gives you greater control of your financial future and increases your asset base over time.
As seen above, there are multiple benefits to getting a good grip on your home equity. When managed well, it can open up opportunities for growth, stability, and greater control over your financial future.
How to Build Home Equity? 6 Strategies to Build Home Equity
The good news is that building home equity quickly can be done with the right strategies. Here are a couple of these strategies that can increase your equity:
- Make a large down payment: If you have a good starting capital base and are about to start building equity with a property purchase, consider paying a higher down payment percentage than what market rates typically dictate. Standard rates are about 20%, but providing a higher DP upfront can translate to larger equity values. It also reduces the value of your private mortgage insurance due to being perceived as less of a risk.
- Increase payment amounts: Paying more than the minimum required monthly payment directly reduces the principal balance much more quickly. Even small extra payments, such as adding an extra $100 or $200 per month, can significantly shorten the loan term timeline. This, in turn, builds equity faster.
- Increase payment frequency: Another way to build home equity is by making more frequent repayments for your mortgage. For instance, if your current payment scheme is monthly, consider switching to a bi-weekly payment scheme instead. This method can increase your home equity figure when you apply for a loan, as you can submit more recent mortgage reports.
- Reappraise your home: If you have made significant renovation improvements or if the market has improved, you can request a new appraisal from your lender. A high-enough value could reduce or remove your PMI obligations, increasing your equity position in turn.
- Avoid unnecessary redraws: While redraw facilities can be convenient, frequently pulling funds out of your mortgage can slow your equity growth. Consider finding alternative ways to gather funds instead if you wish to prioritise building equity.
- Hold your property for the long haul: Lastly, if you want to build your equity passively, a sound strategy is to keep your property under your name over the long run. This allows market appreciation to continuously kick in and passively increase your property’s value, resulting in stronger equity over time.
We hope that we’ve helped you gain deeper insights into how rising property prices can fuel your equity standing in Australia. All the best in your journey towards building a better investment portfolio with your home equity!
This article provides general information only and does not constitute financial advice. It does not consider your individual objectives, financial situation or needs. You should obtain independent professional advice before making any financial decision. References or links to third-party products or websites are provided for general information purposes only.
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