Understanding equity

Equity is the difference between the current value of your home and the outstanding balance on your mortgage. Essentially, it's the portion of your home that you truly own. Leveraging the equity in your existing home can provide significant financial leverage when it comes to purchasing a larger property.

Leveraging the equity in your existing home can provide significant financial leverage when it comes to purchasing a larger property.

How to Use Equity to Upsize

There are two primary ways to use equity to facilitate the upsizing process. Firstly, you can sell your current home and use the proceeds, including the equity, towards the purchase of your new property. Alternatively, you may choose to retain your existing home as an investment property and utilise the equity as a deposit for your new home.

Let's consider an example:

Anika owns a townhouse in Clyde North valued at $750,000, with an outstanding mortgage of $550,000. She wants to upsize to a $1 million property while keeping her Clyde North property as an investment. Anika also has $200,000 in savings.

• Purchase cost: $1m

• Estimated costs including stamp duty: $50,000

• Minus Anika’s savings: $200,000

• New loan needed: $750,000.

By leveraging the equity in her Clyde North property, Anika can secure a new loan and purchase her dream home with the bank using both properties as security while retaining her existing property as an investment asset.

She will owe $550,000 (on existing home) + $750,0000 (new loan) = $1,250,000 (both loans).

In this instance Anika would have security valued at $750,000 (current home) + $1,000,000 (new home) = $1,750,000.

The Importance of Financial Planning

Before making any decisions regarding the use of home equity, it's essential to seek expert financial advice. A qualified mortgage broker can help you assess your financial situation, evaluate your borrowing capacity, and determine the most suitable approach for leveraging equity to achieve your upsizing goals.

Considerations and Potential Challenges

While leveraging equity can provide significant advantages, it's essential to consider potential challenges such as managing multiple loans and meeting lender requirements. Bridging finance may be necessary if you choose to purchase your new home before selling your existing property, so careful planning is crucial to mitigate risks and ensure a smooth transition.

The key message here is don't underestimate the potential of equity in your current home when it comes to upsizing to your dream property. With careful planning, expert advice, and the right approach, you can unlock the power of equity and make your upsizing dreams a reality.