How to Build Equity in Your Paddington Home Faster

Building equity means owning more of your home and owing the bank less. You can speed it up by paying down your loan faster, and a few loan features can help you do that.

Equity is the gap between what your home is worth and what you owe on it. Two things move it: your loan balance going down, and your property value going up. You can only control the first one. This article focuses on that part, for Paddington homeowners who want their home loan working harder.

How Does Equity Build in a Home Loan?

Equity builds when your loan balance falls or your property value rises. Repayments on a principal and interest loan reduce the balance a little each month, while interest-only repayments do not reduce it at all.

Early in a loan, most of each repayment goes towards interest. Over time, more goes towards the loan itself. That is why extra repayments made early tend to matter more than the same extra amount made later.

Your loan to value ratio (LVR) is the loan amount divided by your property's value. A lower LVR means more equity. Lenders often offer more choice, and sometimes lower rates, to borrowers with a lower LVR. This depends on the lender.

Principal and Interest vs Interest Only: Which Builds Equity?

Principal and interest repayments build equity through repayments, while interest only does not. Interest only keeps repayments lower for a set period, but your loan balance stays the same.

The trade-off is real. Interest-only periods are usually limited, and when one ends you pay principal and interest over a shorter remaining term, so repayments rise. Interest-only is more common for investors, and an owner occupied home loan usually suits principal and interest if equity is the goal.

If you need lower repayments for a while, ask whether a lender allows extra repayments later. That lets you start modestly and pay more when your budget allows.

How Does an Offset Account Help Build Equity?

A linked offset account reduces the interest you pay by counting your savings against your loan balance. Your money stays accessible, but you are charged interest on a smaller amount.

Consider a Paddington homeowner with a $600,000 loan at an illustrative 6.75% p.a. and $40,000 sitting in an offset account. Interest is worked out on $560,000 instead. That is about $2,700 less interest a year at that illustrative rate ($40,000 x 6.75%). The homeowner keeps making the same repayment, so more of it goes to the principal. The loan balance falls faster, and the savings are still there if an emergency comes up.

The main trade-off is cost. Loans with a full offset account sometimes carry an annual package fee or a higher rate than basic loans. It pays off mainly if you keep a decent balance in the account. Ask your broker to compare the total cost of a loan with and without an offset.

Should You Choose a Variable, Fixed or Split Rate?

A variable rate moves with the lender's decisions, a fixed rate stays the same for a set period, and a split rate gives you some of each. Which one suits you depends on how much certainty you need and how much flexibility you want.

Variable loans usually let you make extra repayments and use an offset account without limits. Fixed loans often cap extra repayments and may charge break costs if you leave early. Many lenders also do not offer a full offset on the fixed portion.

A split loan can balance this. You might fix half for certainty and keep half variable so your extra repayments and offset savings work on that portion. The downside is that you carry both sets of limits. Our Fixed Rate Expiry page explains what to check as your fixed term nears its end.

How Can You Pay Off Your Home Loan Faster Without Straining Your Budget?

The most practical way is to pay fortnightly instead of monthly, and to add small regular extras. These habits cut the balance without a big change to your budget.

Half your monthly repayment paid every fortnight adds up to 26 half-payments, which equals 13 monthly payments in a year instead of 12. Check with your lender how they process fortnightly repayments, as methods differ.

Consider a homeowner whose loan has a variable rate and a linked offset. They set up a fortnightly payment, then direct each pay rise into the offset account rather than spending it. Over time, the loan balance drops faster than the schedule suggests, and the money stays reachable. The trade-off is discipline, because money in the offset is easy to spend. Our Loan Health Check can show whether your current loan allows these options.

Does Refinancing Help You Build Equity?

Refinancing can help if your new loan has a lower rate or better features, since that frees up more of each repayment for the loan balance. It can also cost you, with discharge fees, application fees, and possible break costs on a fixed loan.

If your lender has not changed your rate or features in years, it is worth asking for a rate discount first. If they will not budge, a refinancing review lets us compare options from our panel of lenders. Keep your repayment the same after switching to a lower rate, and the extra goes straight to your balance.

Can You Use Equity to Borrow More?

Yes, many lenders let you borrow against your equity, subject to a valuation, their lending criteria and serviceability. Equity gives security for the loan, but it does not increase how much you can service. Lenders usually assess how much you can borrow by looking at your income, expenses and debts.

Borrowing against equity increases your debt and your repayments, so it should have a clear purpose. Use our borrowing capacity page to see what may be possible. If you are thinking about buying another property, see our investment loans page. Speak to your accountant about any tax questions before you act.

If you are comparing options for your own home loan, call one of our team or book an appointment at a time that works for you. We will look at your loan, your goals and the lenders that fit.

Frequently Asked Questions