What is a home equity loan?

Here's a closer look at what a home equity loan is and when you may want to consider this financing option.

What is 'home equity'?

Simply put, home equity is the difference between what you owe on your mortgage and what your home is worth. For example, suppose your home is worth $500,000 in today's market and you owe $200,000 on your mortgage. That means you have approximately $300,000 in home equity against which you can borrow.

What is a home equity loan?

A home equity loan is the general term for any type of loan that allows you to borrow against the equity in your property. This may include line of credit loans, 100% offset home loans, and variable rate mortgages with a redraw facility.

You may also have the option of refinancing your existing home loan to access funds.

What can a home equity loan be used for?

One of the main benefits of using equity is that home loan interest rates are generally much lower than other types of credit, and 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 down other types of debt.

Some popular uses of home equity loans may include:

• Home renovations. You can use a home equity loan to finance improvements, which can increase the value of a property or to make it more suitable to your needs.
• Property investing. If you're looking to build your retirement portfolio, home equity can be used to help finance the down payment on an investment property or to buy shares.
• Debt consolidation. Home equity loans typically offer lower interest rates than credit cards, making them a smart choice if you want to pay off high-interest debt.
• Lifestyle affordability. Home equity can be used to finance large purchases, such as a new car, or your own business.

Are there any drawbacks to a home equity loan?

As with any type of financial product, there are some things to consider before taking out a home equity loan.

For example, you may want to watch out for:

• Increased debt. When using your home's equity, you'll be increasing the amount that you owe the bank, which 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.

As always, be sure to consult with your financial adviser or a qualified mortgage broker for help finding the right solution for your particular circumstances.