Home equity
Get more out of the value of your home
Have you owned your home for a while and seen its value increase? Then your home equity might be a valuable resource for your next step. Whether you're looking to renovate, buy a new property, or improve your financial situation, the equity in your home can help. Discover how we can advise and guide you in making the most of your home equity.
What is home equity?
Home equity is the difference between the current market value of your home and the remaining mortgage debt. In other words, it is the value you’ve built in your home since taking out your mortgage. For example, if you purchased your home for €200,000 and still have a mortgage balance of €150,000, and the value of your home has increased to €250,000, your home equity would be €100,000 (€250,000 minus the €150,000 you still owe).
Home equity often arises because the value of your property increases over time, due to factors like rising property prices or improvements you’ve made to your home, such as renovations. This means you’ve essentially built wealth that you might be able to use for various purposes, like renovating your home, purchasing a new property, or making other investments.
It’s important to note that you don't physically have access to this equity unless you actually release it, for example, by increasing your mortgage or selling your property. Home equity can be a valuable source of additional financial space, but it requires action to access it, such as refinancing or selling your home and realizing the profit.
Using your home equity can have benefits, but it’s essential to understand the financial and tax implications before making a decision.
What can I spend my home equity on?
The equity in your home provides you with financial opportunities that you can use for different purposes. Here are the most common spending options:
Renovations or improvements
A popular choice for using home equity is carrying out renovations or improvements. This can range from upgrading a kitchen or bathroom to expanding your home. By investing in your property, you not only improve the quality of life but also increase the value of your home, which can be useful if you decide to sell in the future.
Buying a new home
If you have home equity, you can use it as additional contribution towards purchasing a new property. This gives you the opportunity to buy a larger home or possibly move to a better location that suits your lifestyle. The equity can reduce your contribution for the new mortgage, meaning you may need to borrow less.
Paying off other debts
You can use your home equity to pay off other debts, such as personal loans, car loans, or credit card debts. By consolidating these debts, you lower your monthly payments and the interest you pay. This offers a chance to improve your financial situation and free up space for other goals.
Investments
Home equity can also be used for investments. This could include purchasing a second property, investing in stocks, or starting a business. Investing provides opportunities to grow your wealth, but also comes with risks. It’s advisable to carefully analyze these risks and, if necessary, consult a financial advisor.
Lowering your monthly payments
When you release home equity, you can choose to pay down part of your mortgage. This reduces your monthly payments, as you pay less interest on the remaining mortgage balance. This can be especially beneficial if you want to reduce your monthly housing costs or ease your financial obligations.
Money for personal expenses
You can also use your home equity for larger personal expenses, such as a vacation, purchasing a new car, or paying tuition fees for your children. While this is less common than, for example, renovating your home or buying a new property, it does offer the possibility to fulfill personal dreams and goals.
Financing a care home
If you wish to build or modify a care home to take care of a family member, your home equity can help finance this. This can be particularly useful if your property needs adjustments to accommodate caregiving needs.
It’s important to carefully consider how you want to use your home equity, depending on your personal situation and financial goals.
Tax implications
When you release home equity, it can have consequences for your tax return. Here are the main tax aspects:
Mortgage interest deduction
When you release home equity, you increase your mortgage debt, which means you may be able to deduct more interest from your tax return. This only applies if the additional amount is used for housing-related purposes (e.g., renovations or purchasing a new home). If it’s used for other purposes (such as a vacation or a car), you can’t deduct the interest.Loan and taxes
The tax benefit depends on how you spend the equity:- Renovations: The interest remains deductible.
- Personal expenses: No interest deduction; the loan is treated as a regular loan.
Transfer tax
If you use your equity to purchase a second property (for example, for rental or vacation), you will have to pay transfer tax. This is usually 2% of the purchase price, but you can use the home equity to cover this tax.Wealth tax (box 3)
If you invest the home equity in things like stocks or a second home, the amount will be considered wealth in box 3. This can increase your tax burden if you exceed the exemption threshold.Higher monthly payments and taxes
Releasing home equity increases your monthly payments, which may impact your financial situation. If the interest deductions are lower (for example, for personal expenses), this could affect your tax rate.
Conclusion
The tax consequences of home equity depend on the purpose for which you use the funds. Housing-related expenses provide tax benefits, while personal expenses do not. It’s wise to consult a tax advisor to make the most of your home equity.
Maximizing your home equity
By creatively using your home equity, you can make the most of it for your personal goals. Whether it’s improving your home, investing in your future, or helping others, the possibilities are diverse. It’s important to always be well-informed about the financial implications so that you make a sustainable and valuable choice with your home equity.
