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4 things borrowers can do with an increase in equity

26 OCT 2021 By Noemi Pamintuan-jara 6 min read Finance

Thanks to the property boom pushing up property prices Australia-wide, many property owners aren’t necessarily aware of the fact that they are sitting on a gold mine – their growing equity. 

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RateCity research director Sally Tindall has revealed that “millions of home owners are sitting on a growing mountain of equity, some without even realising it.”

According to RateCity, an average owner-occupier in Sydney who purchased a median-priced house in September 2019 with a 20 per cent deposit and paid principal and interest on a 30-year loan term will have already gained $402,032 in equity in that property due to rising prices. The effect is that their loan-to-value ratio (LVR) has decreased from 80 per cent to 55 per cent.

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This scenario is replicated in other capital cities based on CoreLogic’s September 2019 data on median-priced houses, where borrowers paid a 20 per cent deposit and with LVR at 80 per cent, compared to property prices as of September 2021.

Capitals with the greatest median-price increase are Canberra from $698,550 median house price in 2019 to $956,119 in 2021 (56 per cent LVR decrease) and Hobart from $523,426 to $704,321 (57 per cent LVR decrease). At the national level, the price increased from $557,213 to $719,209, and LVR went down to 60 per cent.

So, how can property owners take advantage of this increase in equity?

1. Apply for lower variable rates

For those who are always on time in making mortgage payments, this one’s for you.

“If you’ve owned your own home for at least a couple of years and have been diligent about paying down your debt, you could refinance to a lower rate,” Ms Tindall advised.

Borrowers with loan-to-value ratios of 70 per cent or less are eligible for 58 per cent of the lowest variable rates.

“Lots of lenders offer interest rate discounts to new customers with loan to value ratios below 70 per cent, including big four banks CBA and Westpac,” she said.

2. Remove a guarantor

Now may also be the best time for you to remove a guarantor so you can qualify for better interest rate discounts. Doing this could also help you save by avoiding lenders’ mortgage insurance (LMI) fees.

“First home buyers who bought with a smaller deposit, and used a guarantor, could potentially take this off their loan if their loan to value ratio is now less than 80 per cent,” Ms Tindall explained.

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3. Switch lenders

Borrowers who already own at least 20 per cent of their home can now switch lenders without paying LMI. Because of the increase in equity, borrowers who started with a small deposit can easily switch lenders.

4. Borrow more

An increase in equity can help you borrow more money from the bank for home improvements or emergency repairs that add value to your property. A fresh coat of paint, upgraded appliances, landscaping, or adding some space could add value to your home and help increase rental income.

Do take note that the maximum loan size is typically limited to 80 per cent of the value of your current home, and application for loan increase is subject to the bank’s serviceability assessment.

Property prices in Australia are on the rise at top speed and may not be slowing down anytime soon. Use these tips to put the increase in equity to good use by making wise investment decisions.

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