If your property has gone up in value, you're probably excited about the news. An increase in your home’s value means more equity—the portion of your home that you actually own.
While this is great news, it’s important to understand how this change can affect your mortgage and how you can make the most of it.
With rising home values, there are options available to you, like lower interest rates, the ability to access equity, or refinance your loan. But what exactly should you do next? Here’s how you can leverage your home’s increased value to save money and potentially grow your investments.
What is Home Equity and Why does it matter?
Home equity is the difference between what your home is worth and how much you owe on your mortgage. The higher your property value, the more equity you build. For example, if your home was worth $500,000 and you owed $350,000 on your mortgage, you would have $150,000 in equity.
When your property increases in value, you automatically build more equity. This gives you more options when it comes to refinancing or taking out a loan.
Using Your Home Equity to Lower Your Interest Rate
If your property value has increased, you have several options for accessing your home equity and putting it to good use. One of the most common options is refinancing, but you can also explore an offset account or reverse mortgage, depending on your goals and financial situation. Let’s take a look at these options:
Refinancing Your Mortgage
Refinancing is the process of switching to a new loan, often with a better interest rate, longer term, or different loan features. When your property value increases, you may qualify for better rates, especially if your loan-to-value ratio (LVR) has dropped. This can save you money over the life of your loan by lowering your monthly repayments or securing lower interest rates.
In addition to lower rates, refinancing can allow you to adjust your loan to suit your financial goals. You could switch from a variable-rate mortgage to a fixed-rate loan or shorten your loan term to pay off your home faster.
Offset Account
An offset account is a transaction account linked to your mortgage, where the balance of the offset account is deducted from the principal balance of your mortgage when calculating interest.
For example, if you have a $300,000 mortgage and $20,000 in an offset account, you will only be charged interest on $280,000. This can significantly reduce the amount of interest you pay, especially if you have a large loan balance and can keep a higher amount in the offset account.
Using an offset account is a low-risk strategy that allows you to save money on interest without taking on more debt. It can be a great option for homeowners who want to reduce their mortgage faster without refinancing or adding new loans.
Reverse Mortgage
A reverse mortgage is another option to access your home equity, particularly for retirees or those who need extra funds but don’t want to sell their property. With a reverse mortgage, you can borrow against the equity in your home and receive funds either as a lump sum or regular payments.
The key benefit of a reverse mortgage is that you don’t have to make regular repayments during the life of the loan. Instead, the loan is repaid when you sell your home, move out, or pass away. However, keep in mind that interest accrues over time, which means the loan balance will grow.
It’s important to carefully consider the long-term impact on your estate and discuss the options with a mortgage broker to make sure it’s the right choice for you.
Which Option is best for you?
If your property’s value has increased, you have options for using that equity. Whether you’re thinking about refinancing, opening an offset account, or considering a reverse mortgage, it’s important to choose the best solution for your financial situation.
John is here to help you make informed decisions. With our local expertise, we can guide you through all your options and find the best deal to suit your needs.
Contact John at Finance First Mortgage Broker today to discuss how you can make the most of your home’s increased value.