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Top 5 ways you can use home equity to your advantage

If you have been making regular payments against your home loan for several years you will likely have built up a significant amount of equity in your home [1]. Did you know, that you can borrow against this equity to get a cash injection that can be used in a number of ways to help you manage your finances? Here are 5 ways:

1. Use it to renovate your home

This is one of the most popular reasons people borrow against their equity. It’s seen as a good investment since the additional money is being spent on the house. By undertaking repairs, cosmetic improvements or functional upgrades on your home, you could also be increasing its value overall. Kitchen re-modelling or improvements pertaining to energy efficiency are smart renovation choices as these are more likely to fetch a higher price when (or if) the house goes back on the market.

2. Borrow against it for investment purposes

You can also borrow against your home equity for investment purposes. Whether you’re investing in property, playing the stock market, or using the funds to start up your own business – this is a great way to get the funds to do so. It’s highly recommended you seek advice from a financial advisor before making any decisions.  While you can often borrow at a very good rate, you’ll want to make sure that the returns validate the decision to cash-out part of your home loan [2].

Using your home equity as investment capital can be a great way to make your money work for you.

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3. Get discounts on study costs

Cashing out against your home equity could also be used for educational purposes. While study assist loans from the government usually only incur interest at the rate of inflation, you can often get significant discounts for paying for courses upfront. Whether you’re hoping to get your children through university without student debt, or looking at undertaking study yourself in order to upskill and potentially increase your earning power, using your home equity is one way of tackling this. Since the qualifications you can earn tend to fetch higher salaries, this may be a smart way to use your equity. For any discount you get to be worth it, you want to make sure that you’re paying off this debt as soon as possible, as you’ll probably be paying slightly more in interest than you would if you took a study loan from the government.

4. Borrow against it to pay off debt

In addition to your home loan [4] you may also have other loans; a car loan, a personal loan, a student loan, outstanding credit card balance – whichever it is – you could borrow against your equity for enough funds to clear all of this debt. Of course, the balance required to eliminate these debts would then be added to your mortgage. For example, if your credit card is maxed out with 20 per cent interest and your home loan is ticking along at 4 per cent, doesn’t it make sense to take advantage of a much lower rate so you can focus on paying principal instead of interest?  It’s important that you still commit to paying down this debt over a shorter period of time than your home loan; you could end up paying more in total interest if you repay this debt over the life of your home loan.

5. Freeing up funds during retirement

Cashing out against your equity can be a good way to free up funds for those in retirement. Typically, the best way forward for retirees is to use home equity when they already own their house. Due to the size of a house as an asset, borrowing against it can be risky so it’s worth consulting with your financial advisor about whether this is the right move for you. It can be a great way to get a little bit of extra money each year to supplement your income, to cover maintenance costs on your house, to cover costs of medical treatment, or in the event that you are selling your home, to help you secure accommodation until you do.

Final thoughts

 As much as using the equity in your home is a great way to borrow at a low rate, most Australians wish to eventually own their home. If you are constantly using your equity to borrow for other things, you’ll make it very hard to do this.

The rule of thumb should be that you pay for shorter term needs or wants over a shorter term – no one wants to still be paying for a holiday they took 5 years ago. By asking for the extra that you borrow to be set up as a separate loan (with a shorter loan term) as opposed to being built in with your existing home loan, you can make sure you don’t end up spreading the repayment of these expenses over the life of your home loan.

To find out how you can use your home equity to your advantage, or to find out more about home loan refinancing, contact our specialist team [5] today.