How Australians’ rising home equity can help make them richer

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Anthony Keane| The Australian| 21 August 2021

Surging property prices have given homeowners a massive increase in financial firepower and the ability to get a better deal on their mortgage.

The equity in a typical Australian home has jumped more than $100,000 in four capital cities in the past 12 months, and more than $74,000 in the other four capitals, CoreLogic data shows. And that’s before calculating the extra equity created by people paying more off their loan principal during the pandemic.

This wealth jump is funding home improvements and investment property purchases, but can also be used to bargain for lower home loan interest rates, mortgage specialists say.

Research group Canstar has found a borrower with 40 per cent or more equity in their home can get a rate as low at 1.77 per cent, compared with 1.9 per cent or higher if they own just 20 per cent of their home.

It says almost 40 per cent of loan providers offer better rates on loans when the equity is greater than 20 per cent.

“Equity is the difference between the value of your property and the amount you still owe on your home loan,” said Canstar money specialist Effie Zahos.

“When a property’s price increases this automatically triggers an equity increase regardless of whether or not extra loan repayments have been made.

“Using your home equity to barter for a better rate can help you cut your mortgage costs and free you up to do more with your money.”

The median home value in Sydney has jumped $151,600 since July 2020. Brisbane is up $96,400, Melbourne $83,700 and Adelaide $74,600. Hobart’s huge housing boom has continued and its average home value climbed $134,300, while Darwin’s price rebound has added $101,500.

Mortgage broker Financia’s managing director, Angelo Benedetti, said higher equity could help people negotiate a lower interest rate “because you are a much lower risk to the bank”.

He said it also gave people a bigger asset to borrow against for renovations or buying an investment property.

“We have seen a huge amount of home improvements – people are saying we will not spend that $50,000 to travel overseas so we will make our home more comfortable,” Mr Benedetti said.

“Some are using equity to buy a new car, some are putting in a home office – for obvious reasons.”

Mr Benedetti said banks were offering competitive investment loans and homeowners were increasingly thinking about taking control of their financial future with investment properties or shares.

“Money is so cheap and they should be doing something with it, provided they have the income and risk appetite to go into it,” he said.

Ms Zahos said equity gave homeowners a financial cushion to help with unexpected expenses, and people looking to use it for investment or further borrowing would need a valuation.

“An opinion of a real estate agent won’t generally count as a valuation,” she said.

“You’ll need an official valuation from a property surveyor or your lender. Most lenders offer one free valuation each year.”

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