Using home equity to renovate

What exactly is equity in my home?

Home equity is the value of your home minus the amount you still owe on your home loan. So if your home is currently worth $850,000 and your mortgage is $450,000. Then you have $400,000 equity, which you may be able to borrow against.

How can I build home equity?

There are several ways that home equity increases, including:

• Rising property values. As has happened over the last few years in Australia, the price of housing keeps rising. If you haven’t increased your loan and you’ve owned your home for a few years, then you may have some equity in it without doing anything other than making repayments.
• Do a renovation. Renovating all, or part of, your home can increase its value beyond the additional money you borrowed to do the renovations. This could result in more equity.
• Make additional repayments or increase your repayment frequency. Making extra home loan repayments helps you pay down your loan faster, increasing equity and reducing the amount of interest charged to your loan. You can also pay down your loan marginally faster by switching from making monthly to fortnightly repayments. Doing this effectively means you’ll make one extra repayment per year.

How do I know if I have equity in my home?

As we’ve said, property values have been increasing, so if you’ve owned your home for a while, it may well have accrued some equity. Find out the current value and subtract the amount outstanding on your mortgage to get an idea of your home equity.

Does having equity in my home loan reduce the amount of interest I need to pay?

Not necessarily. If you have equity in your home loan, it means that you’re not paying interest on that portion of the value of your house. You only pay interest on the amount you owe on your home loan. As long as you make your regular repayments, or even additional repayments, you could save on the total amount of interest you accrue in your repayments over the life of your loan. Having money in an offset account is another way to be charged less home loan interest.

What is a home equity loan?

A home equity loan is similar to any secured loan. You borrow money and the security is the equity that you have built up in your home.

What can a home equity loan be used for?

One of the benefits of a home equity loan is that it can come with more flexible spending terms. Some of the reasons people take out a home equity loan include:

• Extending or renovating your existing home.
• Investing in a business or stocks.
• Adding a pool to your home.
• Making a lifestyle purchase, such as a new car.
• Debt consolidation. Home loans often have lower interest rates than other credit products.
• A special holiday.
• Living expenses in retirement.

What are the pros and cons of home equity loans?

Pros:

• Low interest rates. A home equity loan is generally secured against your property. That means lower risk for the lender and potentially lower interest rates for you.
• Use the funds as you like. A home equity loan can be spent on whatever you wish, subject to your lender’s qualifying criteria.
• Easy to apply for.

Cons:

• Fees and costs. Leaving one loan and starting another may mean discharge fees and loan establishment fees.
• Less equity, more debt. What was a nest egg has now been transformed into a debt. Hopefully it’s a debt which will pay for itself over time but just make sure you’re able to cover the repayments in the meantime.
• Lender’s Mortgage Insurance: If you borrow more than 80% of your equity, then you may have to pay Lender’s Mortgage Insurance.

How do I find a home equity loan that suits me?

iSelect has partnered with Lendi to help you compare home loan products from a range of Australia’s lenders. Click here to get started comparing from a range of lenders online, or give Lendi a call on 1300 186 260.

Updated Last: 25/07/2022