Some might say equity and new homes don’t mix, but that’s not true – all it takes is a few smart moves to generate value for your brand new build
First, let’s clarify what equity is. Equity is the term used for the difference between the value of your home, and what you owe on it. For example:
- Your property’s current market value (what you could sell it for) is $450,000.
- You owe $350,000 on your mortgage.
- Your equity is $100,000.
To get into the nitty-gritty a little more, most lenders maintain the loan-to-value ratio when calculating your accessible equity, which means you might only be able to use 80% of the total. So, of your $100,000, you’d be able to use $80,000 equity for renovating or buying another property.
We’ll go into smart ways to use equity in a moment, but first let’s look at how you can boost equity when you build a brand new home.
Increasing home equity when you build a new house
You might hear that the best ways to build equity quickly are to buy an old house and renovate. That’s true, but buying a fixer-upper might not be in your plans – instead, you might be keen to buy a brand new home at a fixed cost that you can trust, and enjoy living in it from day one.
The reason people say you can’t build equity with a new home is because there’s no room for improvements that boost its value. But, what you can do is make choices that increase your chances of building equity quickly and naturally.
1. Choose your location well
Honestly, one of the most reliable ways to build equity (no matter what the home) is to find a desirable location. The backbone to a healthy rising property market is demand from buyers, so you’ll want to find a growing neighbourhood that will appeal to a large demographic of people.
Here’s some essential ‘attractor factors’ to look for:
- Proximity to important places.
Stay close to places people love and need, places like CBDs (a reasonable commute is fine), beaches, water and green spaces.
- Family friendly amenities.
Think about parks, schools, and childcare facilities.
- Lifestyle and creature comforts.
Look for shopping centres, leisure centres, dining and retail precincts, cinemas and other fun activities
- Easy public transport.
If your suburb is a little further from a major city, good train and bus systems that makes a commute easy are a must
Up-and-coming, masterplanned suburbs are well worth looking into because they’re often fairly affordable to buy in initially, and offer the best of a modern lifestyle. They’re usually well thought-out, full of green parks and walkable pathways, brand new retail centres and funky eateries. Depending on their location, masterplanned communities can grow in demand and value as they become more established.
These kind of fringe suburbs are also called ‘20 minute suburbs’ because they’re within walking or driving distance of life’s essential locations. They’re often connected by highways or trainlines to major cities and places of employment. The offer relaxed suburban living without massive commutes, making them incredibly popular with blue-collar workers and families.
2. Tweak your mortgage repayment plan
You can also manufacture your own equity by paying off a little extra on your mortgage each time. Even a small increase in your repayment – and some clever footwork with your repayment schedule – can make a big difference over a few years.
For instance, if you repaid an extra $30 per week on a 30-year loan of $450,000 (at approximately 4% interest), you’d have an extra $20,000 in equity in 10 years.
Not to mention, you’d have your house paid off three years earlier and save $38k in interest.
You can also switch your repayments to weekly rather than monthly, which means you’ll make a few extra payments each year. All those little tweaks add up to equity you can access later on.
3. Build an incredibly liveable home
Of course, you’ll want to do this anyway because you’ll be living in the home, but it’s a good idea to think about what future buyers might find desirable too. If you’re building the home as an investment property, this step is a must if you want to keep vacancies low.
A good rule of thumb when planning your house is to include upgrades that add value to the blueprint.
For instance, high quality benchtops are great, but a butler’s pantry might increase its market value and make your home stand out in the listings. Extras like ensuites, a double garage, a study nook, or stacker doors leading outside can make a big difference to where your property sits in the market and where it’s valued.
You can talk to real estate agents in the neighbourhood you’re looking at, and you can contact any of our team to ask about our home designs, extras, and the best ones you can add to your new home.
Putting your home equity to good use
A bonus about building a brand new home is that you won’t need to use your equity for renovations for a very long time – decades, in fact! So, you’ll be able to use your equity to create more money. Here’s some ideas:
Turn your equity into a deposit for an investment property.
You can unlock your equity as a downpayment on a new home that you can rent out for income. Initially, it’s likely your rental property will only pay down its own mortgage, but eventually the scales tip and your weekly rental income will start paying off your own home.
An investment property is common and popular way to use equity because you’re investing it into a growing asset. You’ll be making income each week, and holding a property you can sell later for profit. As a bonus, your investment property will also build equity of its own, that you can use down the track for buying another investment for your portfolio.
Using this daisy-chain method, people build multi-million-dollar property portfolios that fund their retirement, all without using excessive amounts of their own funds. In fact, considering it’s possible to nab a loan for as little as 5% down these days (that’s only $22,500 deposit for a $450k home), you might be able to build enough equity in just a few years to leverage another property.
Make improvements down the track
When it does come time to rejuvenate your home, you’ll be able to use the equity you’ve built and refinance your mortgage. This method increases the value of your home without taking cash from your pocket.
To work out your equity and how much you can afford to spend on renovations, find an independent mortgage broker who can run the numbers and find the best loan.
The first step to a new home
Considering it’s currently cheaper to buy than rent in Queensland right now, it makes sense to be earning equity on a home if you can.
So, if you’re considering a new home and need a hand, our team are ready to help. We’re happy to chat about home designs, the best locations for growth and lifestyle, and how much you can borrow for a home.