Home Equity Loans in Australia

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    What is a home equity loan?

    For most Australians, their house is likely to be the most valuable thing that they own. Many people don’t fully know or understand the full potential of their real estate as a financial asset. In this article, you will learn about different kinds of home equity loans and how you can take maximum advantage of the progress you’ve made on your mortgage.

    Home equity loans are a particular type of home loan where your current partial ownership of your home is used as collateral. The more payments that you have made towards your mortgage, the greater equity you currently own in your home. That equity has monetary value and can be used to back up a secured loan, such as a bridging loan.

    For instance, if your current home value is $500,000 and you only owe $300,000 more on your loan, you have $200,000 in home equity, which would be 40%. As your home increases in value, your equity stake becomes worth more. However, if you sell your home, you will have to repay the home equity loan.

    What can you use a home equity loan for?

    Some of the most common uses for a home equity loan include:

    • A deposit for a future home or an investment property
    • Maintenance or repairs for the property
    • Renovations or upgrades for the property
    • Making investments in the stock market
    • Large purchases like vehicles or vacations
    • Refinancing your mortgage on the home

    What types of home equity loans are there?

    Home equity loans can be structured very differently, depending on your current equity stake and your intended plans for the loan. These are the primary ways to set up a home equity loan:

    • Lump sum home equity loans

      This is the most traditional setup for a home equity loan, and it works similarly to a personal loan.You are borrowing a lump sum of money and then paying it back with interest, usually over the course of five to fifteen years. Your home equity is the collateral. The loan will have to be paid off in full before you can sell the property.

    • Home equity lines of credit (HELOC)

      These loans work much like a credit card. You are borrowing money as needed, up to a certain limit based on the equity you have available. Interest is only charged on the amount you actually take out. HELOCs often have a defined draw period during which you can borrow money and only pay the interest, followed by a full repayment period.

    • Home equity refinancing

      These loans are built on refinancing your current mortgage, ideally at a lower interest rate. You are borrowing more money than you currently owe on the mortgage, and getting the difference paid out (e.g if you still owe $300,000, you could borrow $330,000 and receive $30,000 in cash). The loan is backed by your pre-existing home equity.

    • Reverse mortgages

      These loans involve you receiving cash payments for home equity. These are for people who already own 100% of their home, typically retirees. You remain in the home, paying taxes and insurance, and you make no repayments as long as you live in the home. The repayment is then collected when the property is sold or if the owner passes away.

    Home equity loan pros and cons

    While this loan type offers substantial advantages for a wide variety of needs, it also has potential risks and drawbacks, just like any other financial product. Before putting your home equity on the line, learn more about the pros and cons of home equity loans.

    Pros of home equity loans

    • Low interest rates: Since the loan is secured, your rates will often be lower than those on a credit card or personal loan.
    • Fixed interest rates: On top of being lower, your home equity loan interest rate is likely to be fixed, which adds predictability.
    • Tax benefits: For some renovation or home improvement loans, interest paid on a home equity loan can be tax-deductible.
    • Large loan amounts: This loan type can give you access to funds that can go towards big expenses, such as education.
    • Credit score boost: Home equity loans diversify the types of credit you have, which can help your overall credit score.
    • Loan use flexibility: These loans can be used for almost anything, whereas some loans (e.g car loans) are more rigid.

    Cons of home equity loans

    • Foreclosure risk: This is a critical consideration: failure to make payments could result in you losing the entire home.
    • Unpredictable HELOC rates: If you pick a Home Equity Line of Credit, you may get a variable interest rate and pay more.
    • Increased debt: A home equity loan increases your total debt owed and makes you wait longer to fully pay off your mortgage.
    • Less home equity: If a market downturn makes your equity’s value decrease, your loan amount could exceed your equity owned.
    • Overspending risk: Access to a large lump sum can lead to lifestyle creep and sinking further into the debt cycle.
    • Transaction fees: Closing an old loan and opening a new loan can get expensive due to exit and setup fees.

    What are the requirements to get a home equity loan?

    No two lenders have identical requirements, but most borrowers will need to meet the following criteria:

    • Home equity of at least 15%
    • Credit score greater than 600
    • Verifiable income history for 2+ years
    • Debt-to-income ratio of 43% or lower
    • Updated home value appraisal

    Note that if your new loan structure has a loan-to-value ratio of over 80% (in other words, if the loan amount is at least 80% of the total home value), it is very likely that you will need to purchase a new Lender’s Mortgage Insurance policy.

    Can you get a home equity loan with bad credit?

    Many people who are considering a home equity loan might not satisfy all of the above criteria. For these individuals, there are lenders that specialise in high-risk borrowers, but those lenders charge significantly higher interest rates.

    The best practice is to only take out a home equity loan if you have specific plans for how the money will improve your financial standing (e.g renovating your home to help the property value). Many customers spend their loan on temporary lifestyle upgrades and end up at risk of losing their home.

    Home equity loan FAQ

    How do you build home equity?
    To own a larger chunk of your home (i.e more equity), you can make larger or more frequent mortgage repayments. You could also improve the property value via renovations. Finally, some customers take advantage of everyday offset accounts.
    Are home equity loans the same as a second mortgage?
    If there is an existing mortgage on the property, the home equity loan counts as a second mortgage. If the home is already owned outright, then the home equity loan is not a second mortgage.
    Can you have a HELOC and a home equity loan at the same time?
    Yes, you can take out a Home Equity Line of Credit and a home equity loan simultaneously, assuming that you have enough equity to back up both, and that you are approved for both.
    What is a Home Equity Access Scheme?
    This scheme, also called a Reverse Mortgage or a Home Equity Conversion Mortgage, is a government-backed loan designed for older homeowners who have already paid off their mortgages. It helps them use their home equity without needing to sell it.
    Does a home equity loan affect your loan term?
    Since you are borrowing additional money, it will take you longer to pay off the total amount owed on the house. If you don’t want the loan term to lengthen, you would need to increase the size of each payment.
    Can you use a home equity loan for debt consolidation?
    Many people have successfully used this loan type to consolidate multiple high-interest loans into one single low-interest loan. However, tying up your mortgage with other debts carries the risk of worsening your financial situation if not managed responsibly.

    Bottom line takeaways for getting home equity loans

    Many Australians find themselves under-leveraging their biggest asset: the home they live in. For homeowners who have made steady progress on paying off their mortgage, it may be a good time to use a home equity loan for consolidating debt or launching a property-value-boosting renovation.

    At the same time, putting your home ownership on the line can be risky business and should not be done without proper consideration. However, there is no harm in looking at home equity loan offers and seeing what opportunities are available for you.