Everything You Need to Know About Equity Loans
Equity loans allow you to borrow against the equity on your property when you’ve reached a point in your life where you’re ready to:
- invest in property,
- renovating and need to access cash,
- or even just want to consolidate debt.
The primary benefit of equity loans is that home loan interest rates can be much lower than other types of credit. Once approved, the money in an equity loan can be used flexibly for almost anything.
However, there can be some drawbacks to home equity loans too.
To give you a breakdown of everything you need to know, we’ve compiled this comprehensive guide on equity home loans.
How Much Home Equity Can I Get?
Home equity is the difference between what you owe on your mortgage and the value of your property.
So, the smaller the mortgage, the higher your equity will be.
Here’s a simple process to find out how much equity can be accessed:
- Work out how much your home is worth by either having your property re-evaluated or calculating its estimated market value according to your area.
- Subtract the remaining amount of money you owe on your mortgage from the new value of your property at 80%.
- The difference in value will give you a rough idea of the home equity loan you may be able to access.
Home’s market value (at 80%) – How much you owe = Home equity
Here’s an easy way to understand how it works:
80% of the Property’s Market Value | Outstanding Amount You Owe | Approximate Available Equity |
$800,000 | $425,000 | $375,000 |
$900,000 | $650,000 | $250,000 |
$1,000,000 | $700,000 | $300,000 |
What Is a Home Equity Loan?
Home equity loans allow you to borrow against the equity on your home, effectively meaning your house will be used as the security on your loan.
Home equity loans are available in most general home loan products, including:
- line of credit loans (a specified amount of money available from your home equity that is accessed, and charged interest, like a credit card)
- 100% offset home loans (moving your money from your loan account into your offset transactional account will make the balance 100% against the balance of your home loan – and you pay less interest)
- redraw facilities.
Generally, you need to refinance your property to access your home equity.
Why Do People Choose Home Equity Loans?
There are several reasons people choose a home equity loan above taking out a personal loan or a new home loan entirely.
A Home Equity Loan Can Be Easier To Qualify For
Because you already have a home loan, there’s a greater chance of lenders approving another loan for you – especially if you have been consistent with your monthly repayments. This provides lenders additional insurance in knowing that your current home secures your new loan.
A Home Equity Loan Can Have Lower Rates Than Other Loans
A home equity loan will likely have a lower interest rate than credit cards or other loans like personal loans. And, you have the freedom to spend the money on different things.
People choose this avenue for debt consolidation because it allows them to pay off all debts using one home equity loan which will allow them to benefit from the lower interest rate.
A Home Equity Loan Can Be Used for Different Things
Equity loans can be used for anything from college tuition to buying a car.
A few examples of what a home equity loan can be used for include:
- home renovations,
- property investment,
- buying a second home,
- buying shares,
- buying a car,
- medical,
- tertiary education, or
- starting a business.
A Home Equity Loan Can Be Used To Buy a Second Home
Many people use a home equity loan to put down a deposit on a second home or investment property. That way, they can avoid lenders mortgage insurance since their current home acts as a way for lenders to hedge their risk.
Things To Consider Before Taking Out a Home Equity Loan
Before tapping into the equity in your home, there are a few things to consider first. You’ll need to weigh up the pros and cons against your personal financial situation to establish whether an equity loan is a good option for you.
Here are some things that could deter people from taking out home equity loans that could be perceived as cons:
- Using your home equity for a loan means that you’ll have additional monthly repayments along with your mortgage, so make sure you can cover both.
- If you default on your equity loan repayments, you may be in a position to pay default rates on your repayments.
- The value of your property could actually decline over time, meaning you might be stuck with a negative equity property.
- When you sell your home, you must pay the equity loan in full.
How the Mortgage Agency Can Help
At The Mortgage Agency, we are home loan specialists who frequently deal with home equity loans.
We can provide advice when you need to work out the value of your home and assist with refinancing your home loan to access your equity.
If your home equity is still relatively small, our mortgage brokers may still be able to assist. We provide tips to either reduce how much you owe the bank or increase the value of your home to grow your equity and, subsequently, your loan amount.
Our mortgage brokers will assess your financial situation and help you identify whether a home equity loan is the best choice for you.
If you decide to go ahead with a home equity loan, our mortgage brokers will help you through every step of the application process.
Key Takeaways
Your home’s equity is the difference between the value of your home and the remaining balance of your mortgage.
The benefits of equity loans are that they can be easier to qualify for, have lower interest rates than other types of loans, and can be used for different things, including buying a second home.
But, there are also some things to consider before taking out an equity loan, such as increased repayments and additional fees and charges.
Employing the skills of a mortgage broker can be beneficial as they can provide guidance and help along the way.
At The Mortgage Agency, we can help you compare all your options to make an informed decision. Contact us today to discuss any questions you have about your home loan or about applying for a home equity loan.
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
