Using the equity of a currently owned property in the place of a deposit is a popular option for many homeowners who are thinking of building a new house. However, there are a few key considerations to make if you choose to go down this path.
Important note: The information provided in this blog should not be a substitute for financial advice. You should always consult with a professional finance advisor before making any investment decisions.
Equity is the difference between the value of your property and the remaining mortgage debt owing on it. For example, if your current home is worth $550,000 and has a remaining debt of $200,000, your equity is $350,000.
If you plan to use your equity to secure a loan to build a house rather than a cash deposit, you may find that your bank will request a home valuation to reassess how much equity you have in it. This is particularly important if your home’s value is likely to have increased since you purchased the property. The result of the valuation will then inform the bank on how much you can borrow.
There are two ways to use the equity you’ve grown in your current property to help finance your new build.
First, you can use the equity you’ve built up in your current home as direct security to finance your new build. In this instance, the new loan is added to the total debt you owe your bank.
Using the above example of a current home worth $550,000, a $200,000 remaining debt and an equity of $350,000, you may choose to use your equity instead of a deposit to purchase a house and land package worth $600,000.
Your total debt is now $800,000 ($200,000 still owing + $600,000 new finance).
Important! While you may have two separate loans, the bank will see it as one large debt.Pros:
Instead of using your current property’s equity directly as a deposit, you may choose to create a stand-alone loan. This method is often used to release funds for other uses, such as buying a car, doing renovation work, or, as in this case, building a new home. Essentially, it works by shifting the equity you’ve gained into a separate loan, which then becomes the deposit for your new build loan.
To do this you:
Important! Everyone’s financial position is different. Always talk to your bank and/or financial advisor about using your equity to fund your new build.