Home Equity Loans

When you take out a home loan, over time, a couple of good things start to happen. First, your repayments reduce the amount you owe (if you are paying both principal and interest). Secondly, your property may increase in value (subject to usual market variations, any improvements you make, and the intervention of global pandemics, etc. etc.).

As a result, you end up with “equity”, which is the difference between what your house is worth and what you owe. And with a special kind of loan, you can borrow against this equity for things like an investment property or home renovations. So, to learn how to tap into this resource which could be hiding in your home, read on.

So, what is 'home equity'?

As we previously mentioned, home equity is the difference between the amount you owe on your mortgage and how much your home is worth. For example, if your home is worth $500,000 in today's market and you owe $200,000 on your mortgage, you’d have approximately $300,000 in home equity you may be able to borrow against. To get an accurate idea of your equity, you may need to get your property professionally valued.

What is a home equity loan?

In finance-speak, a home equity loan is the general term used to describe any type of loan that allows you to borrow against the equity in your property. These can include line of credit loans, home loan top-ups, renovation loans, or seniors equity loans. You may also have the option of refinancing your existing home loan to access funds. So as you can see, there are lots of choices when it comes to leveraging your home’s equity.

What can a home equity loan be used for?

So why would you want to take out a home equity loan rather than another type of loan? Simple. A home equity loan has the huge benefit that home loan interest rates are generally lower than other types of credit. Plus, the funds can be used for just about anything. This means a home equity loan can potentially help you save money, for example, if you're looking to buy a car or pay out other types of debts. Popular uses of home equity loans include:

• Home renovations: You can use a home equity loan to finance improvements, which may increase the value of a property and may even create more equity for a real win-win.
• Property investing: If you're looking to build your retirement portfolio, you can use a home equity loan to help finance an investment property.
• Lifestyle affordability: Home equity could also be used to finance large purchases, such as a new car, or to establish your own business.

What are the advantages of a home equity loan?

Like we pointed out in the previous section, home loan interest rates are generally going to be lower than those associated with other types of credit products, like personal loans or credit cards. This is because the property you’re borrowing against provides the lender with a high level of security. Another advantage with a home equity loan is that you can usually use the funds for almost any potential purpose, providing you with huge flexibility.

Are there any drawbacks to a home equity loan?

While there are big advantages with a home equity loan, as with any type of financial product, there are a few things you should consider before taking one out. For example, you may want to watch out for:

• Increased debt: When you unlock your home's equity, you'll increase the amount you owe the bank. This means higher monthly payments that could potentially take longer to pay back.
• Transaction costs and fees: If you're applying for a new home equity loan, there may be fees associated with opening the new home loan, as well as for exiting your existing home loan. So, as always, be sure to consult a financial adviser or qualified mortgage broker for help finding a solution for your specific situation.

So what next?

At iSelect, we’ve partnered with Lendi* to help you compare home loan products from over 35 lenders. Just click here, or give Lendi a call on 1300 186 260 (08:30-18:30) to get started.

Last updated: 09/09/2021