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What is equity?

As a transitional lender, we're happy for you to move on to a new lender when you're ready to do so. Unlike other lenders, you're encouraged to consider refinancing. How do you do that? Let's start with understanding equity.

What is equity and how is it calculated?

The equity in your home is the difference between your home's market value and your remaining loan balance. Your equity is essentially how much you own. 

Let's look at an example.

Brett had his home valued and it is currently worth $400,000. He has had his home loan for ten years and has an amount owing of $300,000. Brett's equity is $100,000.

Ways to build equity 

There are two main ways to build equity in your home. Your equity increases:

  1. as you pay off your home loan, or
  2. if the value of your home increases.

    You can control the amount of your loan based on the repayments you make. If you pay more than the monthly minimum repayments, for example, you are reducing the amount of your loan and increasing equity. As you pay off more of your home loan, your equity increases. It can take many years to build equity.

    The value of your home will be based on the general conditions of the property market and location. the standard of your home and the value-added improvements you make to your home.

    Did you know you can check the estimated equity of your home in our app?

    See what our app can do.

    Check in on your home's estimated value and your loan balance so you'll know exactly when you may be able to refinance and move on to another lender. 

    Equity and refinancing

    Equity becomes very important if you are considering refinancing your loan. The amount of equity you you in your home will affect your options. 

    Remember, your mission with Keystart is to reach 20% equity.

    Once you've reached this goal, you may be able to refinance to another lender who may offer lower interest rates and other benefits.

    Importance of loan to value (LVR) ration

    The amount of equity you have in your home will give an indicative loan to value (LVR). Your LVR is the amount of your loan, divided by the value of your home, expressed as a percentage. 

    Looking at Brett's example again:

    His LVR is $300,000 divided by $400,000, which gives an LVR of 75%. Brett has 25% equity in his home.

    You can get an idea of your LVR by doing some simple calculations.

    1. Take note of the amount you currently owe. You can find this in the Get ahead or My loan screen of the app.
    2. Get a rough idea of how much your home may be currently worth. You can check the estimated value of your home within the app, check real estate websites or ask for a real estate valuation from a real estate agent in your area.
    3. Divide 1 by 2 – and then times that number by 100 to get a percentage. This will give you an estimate of your LVR. 

    Some home loan products are only available if your LVR is below a certain percentage, for example, you may see loan products available for 80 LVR. This means the loan product is available if your loan is less than 80% of the value of your home. If your LVR is high, and your loan amount is more than 80% of your property value, your new lender may require lender’s mortgage insurance to offset their risk. This will be an additional cost for you to incur.

    Read more about LMI.

    No equity?

    Remember, one factor in estimating the equity in your home is the current value of your property. The value of your home is difficult to control since house values are affected by the fluctuations of the property market.

    If the property market experiences a drop, homeowners may have little or no equity in their homes. That is, the current value of the home may be less than the amount owed.

    This is particularly relevant for new homeowners as it takes time, often up to ten years, to see a significant reduction in the amount owing on a home loan. If the loan amount is not yet reduced significantly, and property values are not increasing, then there may not be much equity in the loan.

    This can make refinancing difficult.

    How property prices can impact your home loan.

    Plan your move

    While you can't impact the property market, you can build up your equity by making a plan to pay off more of your loan by paying more than the minimum repayments, changing the frequency of your payments, or making additional one-off payments.

    With the Keystart app, you have the flexibility to make changes to your payment methods and frequency under the My loan screen. Here, you have a choice to make a once-off payment or set up additional direct debit payments.

    Home ownership is a long-term goal.

    You may find it worthwhile making a three to five-year plan for your home loan, whether you are just starting out or if you are considering refinancing your loan. Take some time to consider your options.

    Keystart is a transitional lender. We kick-start our customer’s journey into homeownership with our low deposit home loans. We also encourage our customers to move to another lender when they are ready. Once you begin to build some equity in your home, you may be able to get a better deal from another lender in the long term. This can include,

    • better interest rates,
    • offset accounts, and
    • a number of other benefits that you can’t get with Keystart.

    Once you have considered your equity, you may feel that the time is not right for you to refinance. This can be a frustrating decision. Your hard work has not been a waste of time though. You can use the information you now have to build a plan. Can you calculate or estimate a time when you may have enough equity to refinance? Create a three, five or ten-year plan to put yourself back in control of your home loan.