Equity is how much money within your home that you own outright – i.e., the amount of money that you’ve paid off your mortgage, in addition to the deposit. The more money you have paid off, the higher the amount of equity you own.
Equity in a home – examples
Equity can be confusing in the abstract – so instead, here are a few examples to help you grasp what equity in a home is, and how it works.
To work out how much equity you have on a house, subtract the outstanding mortgage balance from the current value of your house. The resulting figure represents the equity you hold in your property.
If you can put down a bigger deposit when you’re buying a house, you’ll have more equity from the beginning.
When your house value increases over time, so does the equity. Several factors can increase house value, including a thriving property market and rising demand due to new developments.
A desirable location, heightened supply and demand, along with favourable interest rates and economic conditions, all contribute to boosting your house value.
This is why people talk about ‘up and coming areas’ – if the house location value is likely to rise, then your equity will as well, making it easier to move when you’re ready.
Every time you make a monthly payment on your mortgage, you are increasing your equity stake because you are reducing the outstanding amount owed on your mortgage. So, the more you pay off, the more equity you’ll own.
Putting down a large deposit for your home will also increase your equity by reducing your loan-to-value ratio (LTV), meaning your equity stake will be bigger if you choose to sell up.
Read our guide on how to save a deposit for a new home for tips on how to save up for a bigger down payment.
Certain home upgrades can also contribute to your equity. When you invest in improvements that increase your home's value, you effectively enhance your ownership stake in the property. This means you’ll bolster the value of your home when you sell.
As the heart of the home, kitchen renovations are one of the most popular ways to add value you to your home. Likewise, bathroom makeovers can also increase your home value as well as spacious open layouts. In fact, even minor adjustments such as upgraded fixtures and fittings can make a difference.
Of course, if you’re buying a Strata home, then you’ll benefit from having a brand new kitchen and bathroom, as well as open plan layouts and other high value features that will add value should you every choose to sell in the future.
You can also increase equity on your home by overpaying your mortgage, either through a lump sum or choosing to make increased monthly payments. This will significantly reduce your interest payments over time, and therefore reduce the outstanding mortgage balance faster, meaning you’ll own more of the house sooner.
