How you can grow – and guard – your home equity
Home equity is not just a “paper profit” when you sell your home. It is the very basis of the assertion that home ownership builds wealth.
That’s the word from Rudi Botha, CEO of BetterBond, SA’s leading mortgage originator, who explains: “In simple terms, the equity you have in your home at any point is the difference between the amount still outstanding on your home loan and the estimated amount you could realise on the sale of the property.
“But it is also much more than that. It is a critical measure for home owners and potential sellers because it represents the return they will make on their own cash invested in the property – that is, the deposit they have paid – and could make all the difference to their lives in future.
“The amount of equity you have in your home can of course increase quite rapidly in a strong real estate market when home sale prices are rising quickly.Significant improvements to a home or its amenities and garden can also increase its value and thus your home equity.
“Even better, you can easily and quickly increase your equity by paying more than the minimum repayment on your bond each month to reduce the capital portion of your home loan, and more homeowners should really be taking advantage of the current low interest rates to do this.”
Every additional amount paid into your home loan account, he notes, also has the benefit of being a tax-free investment, and could also help you cut thousands of rands off the eventual cost of your home.
Botha points out that home equity can rapidly become eroded if home prices slow or fall due to a general economic and real estate slowdown.“And if the slump is really big and fast, as it was in 2008, those without much equity built up can easily find themselves ‘upside down’ – which means owing more on your bond than the estimated sale price of your property.
“This is what happened during the global financial crisis to many people who had recently bought their homes with 100% home loans or very small deposits, or who had perhaps used some of their home equity to pay for other things, like cars, furniture or overseas holidays.”
Which is not to say, he notes, that equity reversals can’t happen in other circumstances. “If you neglect routine maintenance and allow the property to deteriorate, for example, it will obviously be less attractive to potential buyers and the difference between what they might be prepared to pay for it and what you owe the bank will decrease.
“In addition, you really do need to keep a close eye on what is happening to your neighbourhood. If it starts to go into a decline and become less desirable, your home equity will be negatively affected through no fault of your own – and to protect what you have built up, your best move will probably be to sell the property and move to a better location.”