How to protect and grow your home equity

One of the smartest things that homeowners can do is to build up the equity they have in their properties.

Home equity is simply the difference between what a buyer would be prepared to pay for your home today (its market value) and the amount still outstanding on your home loan, and consumers shouldn’t be daunted by the terminology.

They just need to focus on the fact that the bigger your equity in a property, the more you stand to put in your pocket when you sell that property and the more you will be able to borrow for further investments using your property as security.

To some extent equity will grow by itself, provided that home prices keep rising and that the home owner keeps making their home loan repayments.

Any deposit paid at the time of purchase and any reduction of the capital portion of the home loan would increase this equity amount, which can also be boosted by the homeowner paying an additional amount off the home loan every month.

On the other hand, equity build-up can be adversely affected by factors such as a softening economy, rising unemployment and a general loss of confidence among consumers that can cause property sales and appreciation to slow down.

Even in such circumstances there are things that homeowners can do to manage and increase their home equity, the first of these being to avoid any thought of refinancing their home or switching their home loan to a different lender, even to take advantage of a lower interest rate.

There are usually costs and fees involved in refinancing or switching that will significantly reduce any benefit you might gain, and on top of that, home owners often take out cash when they make such a move, reset their loan term to 20 years and deplete all the equity they have built up for no good reason.

Secondly, home owners need to guard against equity “leakage” through improper use of revolving home loan credit.

Other no-no’s for those keen to maximise their equity are secondary liens and debts against the property, as well as unpaid municipal rates and taxes, which all have to be paid when the time comes to sell.

• Information courtesy of Private Property.

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