We discuss equity and negative equity, especially because it can be used to make your money work for you and has a significant impact in mortgage approval.
In real estate, equity refers to the difference between the market value of a property and the outstanding mortgage balance. Therefore, it represents the portion of the property’s value that you truly own. As you make mortgage payments and property values appreciate, your value increases over time. You could see equity as a form of savings that you can use, such as financing renovations or purchasing additional property. If you are looking to access these funds, learn more about how to release equity from your home.
Negative equity is when the outstanding mortgage balance exceeds its current market value. It usually arises when property values decline or when homeowners borrow against their worth without sufficient appreciation in the property’s worth. Unfortunately, it limits homeowners’ financial flexibility and can lead to various complications, particularly if you need to sell the property.
Dropping house prices are bad if you need or want to sell your house. New Zealanders’ budgets are under pressure. The cost of living has increased dramatically. Higher interest rates and declining house prices have made this worse.
House prices dropping is beneficial, as it makes housing more accessible, especially for young people. This is something that New Zealand desires.
A small or moderate fall in the value of your property should not be significant, depending on when you bought it. Your house value is likely still higher now than it was two years ago. The concern exists if you bought during the 2021 peak.
Staying current on payments eliminates the need to worry about negative equity. Therefore, there is no need to be overly concerned. If you need assistance with a mortgage, our brokers can help. They will guide you through the process and find the best solution for you.
Equity plays a significant role in the mortgage approval process in the New Zealand housing market. When you need financing, lenders consider several factors related to property value when evaluating loan applications
The loan-to-value ratio is the proportion of the property’s value that lenders are willing to finance. It is calculated by dividing the loan amount by the property’s appraised value. Lenders often set maximum LVR limits, typically ranging from 80% to 95%. Higher equity levels, resulting in a lower LVR, can increase the chances of mortgage approval.
When applying for a mortgage, lenders require borrowers to provide a deposit, which is generally a percentage of the property’s purchase price. The deposit acts as a safeguard for lenders, reducing their risk exposure. Higher equity levels means you can make bigger deposits, which can lead to better mortgage terms, including lower interest rates and reduced fees.
Equity can also influence your borrowing capacity. Lenders assess your ability to service the mortgage based on your income, expenses, and existing debt obligations. Having a higher level of equity can improve your borrowing capacity since it reduces the loan amount needed. Again, this results in a lower debt-to-equity ratio and potentially more favourable lending terms.
Equity can provide homeowners with opportunities to refinance their mortgages. Positive equity enhances your borrowing capacity, increases the likelihood of mortgage approval, and provides financial flexibility.
On the other hand, negative equity can restrict your options and pose challenges when you want financing.
If you are thinking of using equity by refinancing, see our Refinance Your Mortgage guide
You have probably heard the quote from Robert Kiyosaki “Don’t work for the money, let the money work for you”. Here are some common ways we see borrowers use equity in practice:
Each option has different risks and considerations, so it’s important to understand how accessing equity will affect your overall financial position.
Our mortgage advisor is knowledgeable and experienced. They can help you buy a home, refinance your current mortgage, and offer options to work with regarding equity. Working with them is the best way to achieve your goals.
They can guide you through the process and help you make informed decisions. Get in touch with us right away to talk about how you can use the wealth in your home to reach your financial goals.
Angela is an accredited Financial Adviser, licensed under FSP742251 and has been in the Financial Industry since 2006. Our 5-star Google reviews reflect the excellent customer experience we promise — making your home loan journey positive, stress-free, and rewarding. At Platinum Mortgages, our clients are the reason we exist — so you can be confident your home loan journey is guided by genuine care and expertise.
