The Importance of Home Equity in Building Australian Wealth

Homeownership has always been the first rung on the ladder leading to household wealth. 

“Homeownership has cemented its role as part of the Australian Dream, providing families with a place that is their own and an avenue for building wealth over time. This ‘wealth’ is built, in large part, through the creation of equity…Building equity through your monthly principal payments and appreciation is a critical part of homeownership that can help you create financial stability.”

Home equity is the difference between the current market value of your house and the amount you currently owe on your mortgage. To estimate your equity, subtract your mortgage balance from the market value of your home.

You can find what you owe on your mortgage by looking at your last monthly statement or by contacting your lender. If you need help determining the current market value of your home, contact a local real estate professional.

Is homeownership truly a better path to wealth than renting?

Some argue that renting eliminates the cost of property taxes and home repairs. Every potential renter must realize that all the expenses the landlord incurs (property taxes, repairs, insurance, etc.) are already baked into the rent payment – along with a profit margin. You don’t save money by renting.

Here’s a breakdown of the year-over-year equity gain by categories:

When can you cash in on your housing wealth?

Your home equity is part of your total wealth as a homeowner. The two most common ways homeowners can leverage their wealth are:

• Selling
• Refinancing

Selling:

When you decide to sell your home, the equity you’ve built over time will come back to you in the sale.
For example, if you paid off your $200,000 mortgage and sold your home for $350,000, you would receive $150,000 after closing.

Refinancing: 

You can refinance your current mortgage and take out some of the equity you have accumulated. With today’s historically low mortgage rates, you may be able to take out substantial cash and keep your monthly payment the same.

Thankfully, homeowners today are doing this responsibly and not repeating the same mistakes made in 2006-2008 when some cashed out their entire equity to purchase luxury items like new cars, lavish vacations, etc.

How can these options help homeowners?

During these difficult times, many households are struggling with their housing expenses. Homeowners, because of their equity, have better alternatives. 

“The foreclosure process is based on two steps. First, the homeowner suffers an adverse economic shock…leading to the homeowner becoming delinquent on their mortgage. However, delinquency by itself is not enough to send a mortgage into foreclosure. With enough equity, a homeowner has the option of selling their home, or tapping into their equity through a refinance, to help weather the economic shock.”

What might the future bring?

Most experts are calling for home prices to continue appreciating going forward. 

Bottom Line

Home equity, for most Australian's, is the quickest way to build household wealth.

That wealth gives homeowners more options during good times and in difficult situations.

Need to chat with a Property & Market expert to discuss your selling and or buying needs? Send us an email or click here to book a time.