How home equity loans work
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If you are planning to buy your next investment property, it’s possible to use the equity in your home or other investment properties to help you do so.
You can gain equity by your property increasing in value, whether that is through capital growth or renovation, or paying off your home loan.
What is a home equity loan?
Home equity is the difference between the value of your home, and how much you still have left to pay on your mortgage.
A home equity loan is a loan that allows you to borrow money against the equity you have in your property. There are a number of different ways you could do this:
Refinance your mortgage, which might allow you to restructure your home loan and take advantage of the equity you have.
A line of credit loan allows you to withdraw funds up to an approved limit based on the equity you have in your home, and only pay interest on the funds you have withdrawn.
A bridging loan usually involves using equity in your current property to secure finance to buy a new home while you wait for your current home to sell.
If you have a variable rate mortgage you may be able to take advantage of a redraw facility.
This will let you access funds from any additional repayments you have made on your home loan or an offset account.
Before you decide how you’ll use your equity home loan, however, you’ll need to accurately calculate the available equity in your property.
How much equity do I have in my home?
You can calculate home loan equity by taking your property's current market value and subtracting the remaining loan balance.
The simple formula for this is:
Property's Market Value - Outstanding Home Loan Balance = Amount of Home Equity
For example, you have a home with a market value of $600,000 and a mortgage with $300,000 left to pay. This would mean that you have $300,000 in home equity that you can access.
In order to use equity to access an equity home loan, you initially need to know how much equity you may have available. You can work this out in a number of ways:
- Getting a valuation carried out by a registered valuer
- Carrying out research on what comparable properties have sold for
- Doing an online valuation estimate.
The simple way to know how much equity you have in your home is by calculating the difference between the current property's value and the total remaining balance to pay off your mortgage.
How does a home equity loan work?
Now that you’ve figured out the available equity in your home, you’ll have a better idea of what you can potentially use the available equity for.
Home equity loans allow you to borrow against the equity you have in your home and invest in shares or a new property, repay your debts sooner, renovate your home or pay for lifestyle expenses. We’ll cover these in detail below, but there are a great number of uses for home equity loans in Australia.
Lump-sum home equity loans work just like a standard home loan agreement, where you borrow an approved amount and make the necessary repayments – including interest – over a certain period. It’s pretty simple!
As you’re using equity from a property (a largely secure form of collateral), home equity loans will usually have a fixed rate with terms anywhere up to 10 or 15 years.
What can I use home equity for?
Now the exciting part of what you can actually use your home equity loan for.
A home equity loan can provide a means to further grow your wealth by using the money as a deposit for an investment property and has the huge benefit that home loan interest rates are generally lower than other types of credit.
The funds can be used for just about anything, whether it’s saving money, buying a car, repaying debts, or improving your home. You can also use it to invest in shares, secure bonds, or start a business.
Top 4 Reasons Australians Use Equity Home Loans
Many property investors will say it’s important to repay the loan on your home as soon as you can, in order to maximise your savings (and earning potential from your property) and to further cement your position on the property ladder.
Essentially, the more property you own, the more potential available equity you can release and access to further invest.
You can even combine equity across multiple properties; the equity you are able to access is really just the total amount you own in the properties combined - similar to using multiple high-value pieces of collateral when securing another type of loan.
So how would you use your available equity?
Well, equity home loans are commonly used for investment (which we’ll cover first below) but there are other ways you can use this type of loan security, either to improve your existing property or simply improve your lifestyle.
3 of the main reasons you might access the equity in your home
Equity Home Loans For Investment
A home equity loan can provide a means to further grow your wealth by using the money as a deposit for an investment property. You can also use it to invest in shares, secure bonds, or start a business.
You may be able to use your home equity to help finance the deposit on a new home, and you may choose to use this or your current home as an investment property, which could generate rental returns or other benefits.
Equity Home Loans for Renovations
You can use the loan amount to fund home improvement projects, which can help increase the value of your property.
If you have a major home renovation planned, such as a new bathroom or a bedroom to accommodate a new family member, you might be able to use the equity you have in your home to fund it and increase the value of your home at the same time.
Read more about renovation home loans.
Equity Home Loans for Debt Consolidation
If you have enough equity in your property, you can consolidate all your debts into a single large repayment instead of paying it off in several disparate parts. This allows you to save on interest rates and simplify your finances.
If you are in the process of repaying debts, you may be able to combine these into an equity loan, which could even have a lower interest rate than other forms of credit.
Read more about debt consolidation loans.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
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Written by
Loans Expert
Shaun McGowan
Reviewed by
Editor
Sean Callery
