When you own a property, the equity in the home builds up over time. The equity is determined by subtracting the remaining balance on your mortgage from the assessed value of your property. If your property is worth $500,000, and you have $300,000 remaining in your mortgage, then your equity is $200,000. This all sounds great so far, so why doesn’t everyone do this? It’s worth noting that there’s also something called usable equity.
What Is Usable Equity And How Do I Calculate It?
As the name would suggest, usable equity is the equity that you can actually access, which is lower than your total home equity. This is usually equivalent to 80 per cent of your property’s value minus the remaining balance on your mortgage. Going back to our example of a property worth $500,000, the usable equity in the home is actually $100,000. That’s just half the total equity calculated earlier, which leads on to another important point.
Why Is It Important to Know Your Usable Equity?
When you buy something, it’s important to know the total cost. This is especially the case with buying a property because there are many other costs involved apart from just the purchase price and the monthly repayments. These extra costs include stamp duty, professional fees, and application fees.
Once you know how much your usable equity is, you will then be able to budget for your purchase more accurately. There’s nothing worse than thinking that you have $200,000 to buy and renovate a property, when you actually have a lot less to spend.
How Do I Increase My Usable Equity?
If you’re disappointed with your current usable equity, there are several options you can take to help increase your usable equity. The first is to pay off larger amounts of your debt, for example if you managed to lower your debt to $200,000, down from $300,000, then your usable equity will jump up to $200,000, a significant improvement. Another option you have is to increase the value of your property, which you can do by renovating it. Keep in mind though that not all renovations can boost your property’s value significantly. It’s best that you work with professionals who can guide you on how to make a considerable increase in the value of your property without having to spend a lot of money.
Beyond Your Usable Equity
Knowing your property’s usable equity is important because it helps you know exactly how much your budget will be if you’re planning on buying a property. Always remember that your usable equity isn’t the only thing that lenders will refer to when you want to take out a mortgage. Lenders will get an overall look at your ability to make your monthly repayments, so it helps to have a steady job, a savings history, and a good credit history.