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Borrowing To Renovate: Everything You Need To Know About Using Home Equity

Corner kitchen with blue cabinets

Renovating your home is equal parts exciting and challenging. Whether you’re installing a new kitchen, upgrading your bathroom, or planning a complete house reno, home improvements require a lot of planning. The design, dimensions, timeline, and, most of all, how you’re going to pay for it all.

It’s ok to have big renovation dreams, but you might be brought back down to earth once you tally up the costs. 

Do you have the cash available to make it happen?

If not, there’s still a way to finance your project. We’re talking about home equity. If your home has increased in value since you purchased it, you may have built enough equity to fund your home improvements. 

But there are a few things you need to know first, so let’s dive in.

What is home equity?

Home equity is the difference between the current market value of your property and what you owe on your mortgage. The amount of equity you have changes alongside property market fluctuations and mortgage repayments. 

When the market value of your home is more than what you owe, you may be eligible for a home equity loan to renovate. However, the extent of your renovation plans will depend on the amount of equity you have.

How to calculate your home equity

You only need two figures to calculate your home equity.

  • The current market value of your home, which you can find out here.
  • The balance remaining on your mortgage.

Take what you owe on your mortgage off the market value of your property. If your market value is $700,000 and your mortgage is $300,000, you will have $400,000 in home equity. 

While the figure looks enticing, you may not be able to borrow the full amount. Like any loan, you will still need to go through the approval process and prove that you can service the amount comfortably.

 Bathroom with carmine-red cabinet

How much of your equity can you borrow?

Most lenders like to retain at least 20% of your property’s value. 

In most cases, you can borrow up to 80% of your home equity. 

Therefore, if your equity is $400,000, you may borrow up to $320,000.

This is called your accessible equity.

What are the benefits of using home equity?

Home equity is an easy source of cash for responsible borrowers. There are many benefits to using a home equity loan to fund your renovations project. 

Here’s how a home equity loan can benefit you:

  • Home equity loans generally have a lower interest rate than a personal loan or credit card.
  • You can spread out the cost for up to 30 years.
  • You can use your cash in several ways, such as renovating your home, purchasing a new property, buying a boat, going on holiday or paying off other debt.
  • Home equity loans have flexible loan terms.
  • The amount is added to your existing mortgage, making it easier to manage than having multiple loans.
  • The interest rate can be fixed for up to 10 years.

What are the risks of using home equity?

A home equity loan is exactly that: a loan. While it’s easy cash, it’s cash that you must pay back. 

Consider the size of your current mortgage. Can you afford to add to your current repayments?

Like any loan, taking out a home equity loan comes with a risk. Ask yourself whether you’re able to bear these risks:

  • If the market value decreases significantly, you could end up owing more on your home than it’s worth.
  • If interest rates increase, your loan repayments may become too large to manage.
  • If your income reduces, you may not be able to make repayments.
  • When you sell your property, you will need to pay the loan balance.

For many people, these are significant risks. It pays to think about how you’ll service a larger mortgage should anything change with interest rates or income.

How to qualify for a home equity loan

Qualifying for a home equity loan depends on various factors. Lenders will assess your financial situation, including your income, current mortgage repayments, and daily living expenses. 

Your financial circumstances will ultimately determine whether the bank lets you draw down your equity to fund your home renovations.

Depending on the value of your property and the amount you’d like to borrow, lenders may require you to take out Lenders Mortgage Insurance. LMI is a one-off premium that gets added to your home loan and protects the bank if you’re unable to repay the loan in full.

How to grow your home equity

If you want more home equity to play with, there are ways in which you can grow it yourself. 

Pay off your mortgage faster

Increasing your repayments means you can pay off your mortgage faster. The smaller your mortgage, the more equity you’ll have. 

Small sacrifices now lead to huge benefits later. Tweak your budget to free up some extra cash that you can put towards your mortgage repayments. Even small amounts can knock months – even years – off your loan term and build home equity faster. 

Upgrade your home

So, you want to use your home equity to upgrade your home… but you want to upgrade your home to build your home equity. We know this can seem a little confusing.

Minor upgrades can significantly boost the value of your home. Where there’s value, there’s equity. Of course, even DIY jobs can be costly. Taking out a small personal loan to fund your renovations is an easy way to access cash and will benefit you financially in the long term. 

Here are 10 DIY upgrades that can increase your property’s value.

  • Build a deck
  • Landscape your yard
  • Install a pergola
  • Upgrade light fixtures
  • Repaint your interior walls
  • Install a kitchen backsplash
  • Upgrade your bathroom fixtures
  • Replace window treatments
  • Restore wooden floors
  • Wash and repaint exterior walls

Saving for home renovations is easier said than done when you’re paying off a mortgage. Fortunately, a home equity loan provides a solution to homeowners who don’t have the cash to throw into an upgrade.

There’s no need to put your renovation dreams on hold. Apply for a home equity loan today and create the home you’ve always wanted.