Equity in your property can be defined as the difference between the actual market value of your property and the amount that is the unpaid mortgage of a home-owner.
The equity in your property increases if you pay the remaining loan regularly and if the value of your property also increases.
For example, if you buy a property of worth $300,000 and pay 20% deposit ($60,000), you’ll borrow a loan to pay for the remaining ($240,000) balance. Your equity in the property is $60,000 ($300,000 loan less $240,000).
In this scenario, you effectively “own” 20% of the property and your ownership stake in the property increases as the different between the property price and the loan balance increases.
Now if the value of your property is increased and reached to its double i.e. $600,000. You still have to pay the remaining balance that was left at the time when your property was half of its price. In this way, you possess an equity stake of 60%. The balance of your loan hasn’t changed but the value of property equity has increased.
How can you manufacture equity in your investment property?
There are numerous ways to increase equity in your property. Let’s have a look at some of them.
Higher initial deposit – Try to pay a larger deposit at the time of purchasing the property. The remaining balance will be less, and you will likely pay less interest over the long term also. Where possible, aim high with the deposit.
Renovating of the property – Renovating your property strategically can be a way to boost your equity. Ideas such as adding an extra bedroom, adding an outdoor area or a garage or carport can be done at a relatively low cost, but boost the equity beyond your outlay to renovate. Lesser ideas like new flooring, a kitchen upgrade, or even considering a bathroom renovation can also pay dividends.
Shorter loan period – Usually banks give an option to pay your loan in a period of 30 years. But you can make this period shorter if you are able to pay more every month, like 15, 20 or 25 years. In this way, you ultimately end up paying your loan down sooner.
Extra repayments – Consider making lump sum payments from work bonuses or cash gifts. Even if it’s only a few hundred dollars here and there. It does add up over time.
Refinance – Provided that you’re not on a fixed rate, refinancing every 2-3 years to a lower interest rate is a very simple, yet often overlooked way to pay down your loan quicker. The trick when refinancing is to keep paying the same amount you were before the refinance was done. This way, more of your regular payment will be principal than before and you will find that it quickly ads up over time.
Pay weekly or fortnightly – There’s an old trick to pay your loan of quicker, which is to take your monthly repayment, divide that amount by 2 and make that as a fortnightly repayment.
Paying fortnightly allows you to squeeze in the equivalent of one extra monthly repayment per year. The following example gives you an idea of how it works:
Assuming your monthly repayments were $2,000, after a year you would have paid $24,000 (12 x $2,000). To pay fortnightly, you split your monthly payment in half, making a fortnightly payment of $1,000 ($2,000 divided by 2).
As there are 26 fortnights in a year, you will pay $26,000 (26 x $1,000). This is $2,000 (equivalent to one monthly payment) more than if you were making repayments on a monthly basis. extra amount comes directly off your loan principal, and reduces the amount on which future interest will be calculated.
As the interest is less, more of your repayment will be going towards paying the principal off your loan, which means that your mortgage gets paid off sooner. (Source https://www.yourmortgage.com.au/home-loan-guide/fortnightly-vs-monthly-repayments/78306/)