Millions of borrowers sitting on growing mountain of equity

Soaring house prices might be a thorn for first home buyers, but the property boom in recent years has seen existing borrowers’ equity skyrocket.

RateCity.com.au research shows in Sydney, an owner-occupier who bought a median-priced house in September 2019 with a 20 per cent deposit, paying principal and interest on a 30-year loan term has experienced a $402,032 increase in equity.

Their loan-to-value ratio (LVR) has fallen from 80 per cent to 55 per cent.

In Melbourne, an owner-occupier who bought a median-priced house in September 2019 with a 20 per cent deposit, under the same terms has experienced a $192,950 rise in equity.

Their LVR has fallen from 80 per cent to 63 per cent.

The RateCity database shows 58 per cent of the lowest variable rates are only available to people with big deposits of 30 per cent or higher, including CBA, Westpac, St George, BOQ, Bendigo Bank, and Macquarie. 

Owner-occupier purchasing the median-priced house – September 2019 (CoreLogic)

Starting with 20% deposit

Sally Tindall, research director at RateCity.com.au, said:

“Millions of homeowners are sitting on a growing mountain of equity, some without even realising it.”

“If you’ve owned your own home for at least a couple of years, and have been diligent about paying down your debt, you could refinance to a lower rate,” she said.

“Lots of lenders offer interest rates discounts to new customers with loan to value ratios below 70 per cent, including big four banks CBA and Westpac.

“First home buyers who bought with a smaller deposit, and used a guarantor, could potentially take this off their loan if their loan to value ratio is now less than 80 per cent.

“What goes up can also go down. If the market takes a dip, the proportion of your home you own will also drop,” she said.

What can mortgage borrowers do with an increase in inequity?

•  Borrow more: People who have seen their equity rise can potentially borrow additional money from the bank for big-ticket items such as a home renovation (any loan increase would still be subject to the bank’s serviceability tests and the maximum loan size is typically limited to 80% of your current house price).
• Apply for lower rates: 58 per cent of the lowest variable rates are available to borrowers with loan to value ratios of 70 per cent and under.
• Remove a guarantor: first home buyers who used a guarantor could reach a loan to value ratio of 80 per cent earlier than expected and apply for the condition to be removed from their mortgage.
• Switch lenders: customers who don’t yet own 20 per cent of their home typically don’t switch lenders because they would have to pay lenders’ mortgage insurance again. The increase in equity helps borrowers who started with a small deposit switch lenders sooner.

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About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.