Have you been dreaming of upgrading your family home but don’t have enough savings to cover the expense? If you plan to renovate your property, you can finance the renovations or improvements by accessing equity within your property. You can use your home equity wisely if you know these tips:
The first step is to determine how much equity you have in your home. The equity in your property is the difference between its current value and the mortgage balance. For example, if your home is worth $900,000 and you owe $600,000 on your mortgage, you have $300,000 in equity.
Upgrading your family home whilst accessing equity
Taking out a loan using equity, sometimes known as cross-collateralisation, is a loan that allows you to borrow money using your home’s equity as collateral. Your home equity is the difference between the value of your home and the outstanding balance of your mortgage. The amount you can borrow through equity is typically based on the amount of equity you have in your home.
Some advantages of using a home equity loan to upgrade your family home include:
- Lower interest rates: Using equity may attract lower interest rates because the next purchase is secured by your home.
- Access to large amounts of money: Because accessing equity is secured by your home’s equity, you can typically borrow larger amounts of money than you could with a personal loan or credit card.
- Tax advantages: In many cases, the interest you pay on the equity released [if being used for investment purposes] may be tax-deductible, which can reduce your overall tax bill.
- Flexible repayment terms: Using equity typically has longer repayment terms than personal loans or credit cards, which can make it easier to manage your monthly payments.
The amount that can be borrowed through equity depends on the amount of equity in the property and the lender’s policies. Generally, lenders will allow borrowers to borrow up to 80% of the value of their property (often described as ‘accessible equity’) but this can vary depending on the lender.
Adding value to your home, and your lifestyle
In addition to the freedom to tailor your living space, upgrading your home can add financial value to your property, which can be beneficial if you plan to sell in the future. It can also provide value to your overall lifestyle and living experience. By improving your home’s fixtures, appliances, and finishes, you can create a more stylish and comfortable living environment that meets your family’s needs and preferences. You can also take advantage of the latest smart home technology to improve your home’s security, lighting, and entertainment systems, making your home more convenient and enjoyable to live in. This is especially rewarding if you have a growing family, fussy teenagers, or simply looking to add some spark to your existing home and modernise your surroundings.
You may also be able to take advantage of improved energy efficiency, which can result in lower energy bills over time. By incorporating energy-saving features such as solar panels, double-glazed windows, and efficient appliances, you can reduce your energy consumption and save money on bills. In addition, eco-friendly upgrades can also help reduce your carbon footprint and contribute to a more sustainable future.
Doing any or all of these things is a great way to increase your property value, which can be a smart investment in the long run. Whether you’re looking to sell your home in the near future or simply want to increase its value for future generations, investing in what you already have and improving your overall living situation is a smart strategy to consider.
Other options to consider if you need to finance an upgrade
Refinancing
Refinancing your existing mortgage is another straightforward way to access additional funds, and free up some cash to make home improvements. This process involves going through a formal loan application process and being assessed on your borrowing capacity.
The difference between refinancing and simply releasing equity for a new purchase is that refinancing replaces your existing mortgage with a new loan, whereas when you release equity you may simply just be taking on a separate loan in addition to your existing mortgage.
Personal loan
Taking out a personal loan is another option for homeowners who want to renovate or upgrade their homes. Personal loans are unsecured, which means they don’t require collateral like a home or car. Instead, they are based on your creditworthiness and ability to repay the loan.
With a personal loan, you can borrow a lump sum of money and use it for any purpose you choose, including upgrading your family home or purchasing goods for the home, such as furniture and electronics. The amount you can borrow will depend on your income, credit score, and other factors. Personal loans usually have fixed interest rates and repayment terms, making it easier to budget for the loan payments.
One benefit of using a personal loan for home upgrades is that you can often get the funds quickly, without having to go through a lengthy loan approval process. This means you can start your home upgrades sooner rather than later. Another advantage is that you won’t have to use your home as collateral, which could put your home at risk if you’re unable to make payments.
However, keep in mind that personal loans typically have higher interest rates than home equity loans or lines of credit. Additionally, the loan terms are usually shorter, meaning you’ll have less time to pay off the loan. Before deciding to use a personal loan for home upgrades, it’s important to compare the interest rates and terms of different lenders and make sure the monthly payments fit within your budget.
It’s essential that you speak with a broker or finance expert to determine which option is best for your specific needs and financial situation. They can provide you with guidance and help you explore different financing options.
Make sure you have enough funds to create your dream home. With the right financing, you can turn your renovation dreams into reality.
