“Putting it on the house” has taken on more and more meaning for New Zealanders, who’re using their home equity to fund home renovations.

But what does it mean and how does it work? Here are some key things to know.

How your home’s equity is calculated

Equity is the value of your property minus the money you owe on it.

Assuming you own a home, as the years go by, you pay down your mortgage and property values inch up, the amount of equity that you have in your property increases.

In recent years, fast-rising property values have meant many people have seen rapid increases in their equity. While that doesn’t mean a lot in terms of their everyday lives, it increases their net worth and the security available for them to borrow against.

It’s common for lenders to be willing to lend a total of up to 80 per cent of the property’s value, if the owner has the income to service that debt.

Suppose that you buy a house today for $600,000 with a deposit of $120,000 (20 per cent of the property’s purchase value), and your lender provides you with a mortgage of $480,000. You now have $120,000 of equity: the value of the property ($600,000) minus the mortgage amount ($480,000).

Jump ahead five years. You’ve reduced the mortgage balance and now owe $440,000 on it, which adds $40,000 to the equity you initially had. Plus, your property may have gained value and is now worth $680,000 according to the bank’s evaluations. That’s another $80,000 added to your equity.

So in five years’ time, the equity in your property has increased by $120,000 ($40,000 plus $80,000) on top of the initial $120,000, and amounts to a total of $240,000. You may be able to use this sum to get a mortgage increase from your bank and use that to spruce up your property.

Why is it a good idea?

With interest rates on home loans so low at the moment, this seems like a great idea to many people. The choice between a 12% interest personal loan to fund your renovation, or the option of putting it on the home loan at about 3 per cent, seems like a no-brainer.

Why might it not be?

The problem is that interest rates won’t always remain so low, and the longer you carry debt, the more expensive it gets. If you borrow against the house and structure your loan so it’s paid off in a small number of years, you should save money compared to borrowing over a similar term at a higher rate.

But if you end up carrying that extra debt for the full 25 years you have left on your mortgage, it will be much more expensive.

Does it add value?

Sometimes, people undertake renovation work with the intention of increasing a property’s value, either for sale or revaluation.

If you are planning to renovate to appeal to future buyers, it’s worth taking time to map out your planned work carefully.

Renovation work for sale requires a careful assessment of what will deliver the greatest impact for the smallest amount of money so as not to overcapitalise, keeping the needs and wants of your target buyers top-of-mind.

Generally, that means fairly neutral updates, without the personal flair that you might add to work being done to a property you plan to keep living in.

Are you exploring your options?

If you’re planning to tap into your equity to fund some work on your home, we can help. Get in touch today to talk about what might be possible.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.