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’re paying both principal and interest).  

Second, your property might increase in value (subject to usual market variations, inflation, or any improvements or renovations you choose to make).  

As a result, you build equity, which is the difference between what your house is worth and what you owe.  

And with a Home Equity Loan, you can borrow against this equity for things like an investment property or home renovations.

What is home equity? 

Home equity is the difference between the amount you owe on your mortgage and the amount 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. Generally, you could potentially borrow 80% of that amount, which is known as your usable equity. So in this instance, your usable equity, or the amount you can likely borrow, is $240,000.  

To get an accurate idea of your equity, you’ll likely 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, or the Home Equity Access Scheme for seniors.  

You might also have the option to refinance 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.

How do I calculate the amount of equity in my home? 

You can calculate your home equity by subtracting the money you owe on your mortgage from the bank valuation of your property. 

For example, if the bank valuation of your home is $1 million, and your outstanding Home Loan balance is $600,000, then you have $400,000 in equity. 

Keep in mind that many lenders will only allow you to access up to 80% of your equity, which is known as usable equity. If you’d like to access more than 80% of your usable equity, then you might need to apply for lenders’ mortgage insurance. 

What can a Home Equity Loan be used for? 

Potential uses of Home Equity Loans include:  

• Home renovations: You can use a Home Equity Loan to finance improvements, which could even increase the value of a property and create more equity.  
• Property investing: If you’re looking to build your real estate portfolio, you can use a Home Equity Loan to help finance an investment property. 
• Business or lifestyle purchases: You can also use home equity to finance large purchases, such as a new car, or to establish your own business. 

What are the advantages of a Home Equity Loan? 

Although Home Loan interest rates rose steadily throughout 2022–23, they’re generally 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 higher level of security.  

Another advantage of a Home Equity Loan is that you can usually use the funds to purchase whatever you need, providing you with lots of flexibility.  

Are there any drawbacks to a Home Equity Loan? 

While Home Equity Loans have some advantages, as with any type of financial product, there are a few things you should consider before taking one out.  

You might want to watch out for:  

• Increased debt: When you unlock your home’s equity, you’ll increase the amount you owe the bank as a consequence. This means you could have higher monthly payments that could potentially take longer to pay back. And of course, if you’re not able to manage the repayments, it’s possible you could lose your house. 
• Transaction costs and fees: If you’re applying for a new Home Equity Loan, there could be fees associated with opening the new Home Loan, as well as for exiting your existing Home Loan. So, as always, consider consulting a financial adviser or qualified mortgage broker for help with finding a solution for your specific situation.  

How do I access my home equity? 

It depends on the type of Home Equity Loan you’re looking for. Generally, the first step is to get your house valued by a bank, so you can figure out how much equity you have. Then, it’s time to start looking at the different types of loans to decide which type is right for you. It’s worth asking your current lender whether your existing loan has refinancing options. Equally, it can also be useful to talk to other lenders to see if you can find a better deal. 

How can I build my home equity? 

There are ways to increase the value of your property and therefore your home equity. 

You could choose to renovate your home to make it more appealing to potential buyers and give its market value a boost. 

You could also choose to make extra repayments to help pay off your Home Loan sooner. If you’re considering this option, talk to your lender to check whether you’d be charged extra fees for doing this. 

Talking to your lender can help you get a better understanding of the ins and outs of your Home Loan so that you can make an informed decision. 

How can I find a Home Equity Loan? 

Ready to start looking at Home Equity Loans? We’ve partnered with Lendi* to help you compare Home Loans from more than 25 lenders. Give it a try now!