What Is Home Equity?
Home equity is the difference between the value of your property, and the amount you owe on it. To work out the value of your property, compare it to recent sales of similar properties nearby.
If you are unsure what your property is worth or how much equity you may have available, contact us. We have property valuation experience, access to property sales data and we are happy to help you.
Reasons For Using Equity In Your Home
Using equity to buy investment property or a second home is a common reason to access home equity, because it means you don't need to save up a deposit.
Borrowing against the equity in your home gives you access to funds at home loan interest rates. This can save you money in monthly repayments because home loan interest rates are significantly lower than other forms of credit.
If you have you been spending more than you have been earning, you may have found yourself with credit card debts you have no way to pay off. You may be able to access your equity and borrow money against your home to pay them off. This is known as debt consolidation. However it is likely you will need to agree to close the credit card accounts or reduce their limits, once you have paid them off.
It's important to remember that borrowing against equity is increasing your debt, so it may take longer to pay off your home.
What Can I Use My Home Equity For?
You can apply to access the equity in your home for just about any reason. Depending on the loan to value ratio, your lender may want to know that the funds are needed for. Common reasons for using home equity include;
- consolidating debts such as credit cards, car loans or personal loans
- buying a new car
- buying an investment property
- buying a second home or holiday house
- renovations such as a new kitchen or bathroom
- home additions such as a deck or outdoor entertaining area
- other investments such as shares
- other purposes such as weddings, honeymoons and holidays
How To Use Equity In Your Home
Using equity in your home can be acheived in several ways. If you already have a home loan using equity in your property could be as easy as making a phone call your current lender. Here are the ways you can access your home equity:
If you have been making extra repayments, you may be able to withdraw them using a loan feature known as redraw. Your current lender will be able to advise you if you can redraw any extra repayments you have made. If not already activated, redraw is usually 'switched on' upon request to your lender over the phone. Once activated you simply transfer the available funds from your loan to your transaction account.
Your lender may offer redraw as a free feature on your loan. However some lenders charge a fee, and some loan types don't allow redraw at all. Redraw is the easist way to access some of your home equity. When you use redraw you are simply withdrawing your extra repayments. So your lender doesn't need to know what you want to use the money for.
Another option for using equity in your home is to increase your home loan with your existing lender, this is known as a 'Top-Up'. There will most likely to be a fee of a few hundred dollars involved to top up a home loan. You will need to go through the process of an application again, and your lender will ask what you want to use the funds for. If you are going to be charged a Top-Up fee and have to go through an application to increase your home loan, a refinance may be worth considering instead.
Refinancing to another lender and increasing your loan amount is another way of borrowing against equity in your home. It also gives you the opportunity to get a lower interest rate and features that better meet your current needs. When you refinance and want to borrow more than your current home loan balance, the new lender will ask what you want the extra funds for. For example you may want to buy a new car, renovate or consolidate debt into a new mortgage to reduce your total monthly repayments.
If you are interested in refinancing to use your home equity contact us to discuss your options. A cashback broker can discuss your individual scenario, help you find a great loan to suit your needs, plus give you a trailing commission refund each month for the life of the loan.
Home Equity Loan
If you don't presently have a mortgage on your home, but you require funds, a home equity loan may be an option for you. Also known as a line of credit, a home equity loan enables you to withdraw money as you need it, up to an approved limit. The lender would require an application, including assessing your income and expenses. We can help you with all this, contact us to get started. If your application is approved the lender would take a mortgage over your property upon settlement.
After settlement, as you withdraw money your loan balance will increase. Interest is only charged on the balance owing. The interest payable is taken out of your loan balance, so there effectively are no regular repayments required unless you have withdrawn up to the loan limit. This type of loan doesn't suit everyone as it is basically a giant credit card on your home, but with a much lower interest rate. Usually the maximum you can borrow with a home equity loan is 80% of the security property value.
Equity Release Loan
Also known as a reverse mortgage or a seniors equity loan, this type of loan allows you to borrow against your home to access either a lump sum, or a regular income stream. The interest payable is added to the loan balance. So provided your loan remains below it's limit you will not need to make repayments.
You need to be aged 65 or over to apply to unlock your equity in this way. With most reverse mortgages the maximum you can borrow is 40% of the value of the property. You are required to repay the loan in full when you sell the property, move out or into aged care or when you pass away. A good resource for information about Equity Release Loans is available on the ASIC Moneysmart website.
Loan For A New Purchase
You can apply for a new home loan using equity in your home to purchase a second property. This is the way most people start off in property investing because you don't have to go through the process of saving another deposit. For this to be possible you need to have enough equity to cover the deposit and costs for the new property. The process is quite straight forward, contact us to find out how to get started using equity to buy a house.
Find Out How You Can Use Your Home Equity
Interested in using equity in your home to buy a second home, investment property or consolidate debts? A cashback broker can help you work out how much home equity you could access to reach your goals.
How Does Equity Work When Buying A Second Home
Using equity to buy a second property is quite straight forward. If you have enough equity in your home you can borrow against it and use the money to either buy the second property, or as the deposit for it.
If the second home is an investment property, for tax reasons you may wish to borrow the maximum against that property and only use a minimal amount of equity in your home for a deposit. Chat to your accountant about how to structure your investment lending to best meet your needs.
When you apply for finance to buy a second home, the lender you select will consider your living expenses and income. If the property will be an investment property the sales agent can give you a rental estimate letter. The lender will then include the proposed rental income from the property as part of your income. Lenders only take into account around 75% of the rental income, because they allow for some vacancy periods. If your property is a holiday let rather than a permanent rental, lenders may not be willing to consider any of the potential income from it.
The beauty of using equity for investment property or second home purchases is that you don't have to save up a deposit. If you'd like to discuss how much equity you have and how how can access it, contact us for an obligation free chat.
Use Your Equity & Get A Trailing Commission Refund
Contact us to find out how you can get a cashback equity loan. Same lenders, same loans and rates, plus at least 0.15%p.a. cashback direct to your bank account each month.
How Much Can I Borrow Using Equity?
The short answer is generally between 40% and 95% of the value of your property. It depends on your individual situation; the type of home equity loan you are seeking, the value of your property and your income.
Standard Home Equity Loans, also known as a Line of Credit, are available for up to 95% of the security property value. However if you borrow over 80% of the value of your property, lenders mortgage insurance will be payable. This can be hefty and it benefits you in no way, it is purely to insure the lender for their risk - so it is best avoided if possible.
Some equity loans for special purposes such as a seniors reverse mortgage, only permit borrowing up to 40% of the security property value and are restricted to customers aged 65 years and over. Contact us to find out how much home equity you could access.
Can I Consolidate Debt Into A New Mortgage?
Using home equity to borrow more money means you will increase your home loan amount, and therefore your monthly home loan repayment amount. To use your equity you must have the income required to support a higher loan repayment.
In recent years credit providers have tightened their lending crieteria. This means that you may no longer qualify for the loan amount you did previously. Unfortunately some people are therefore stuck with their current lender and interest rate, and cannot refinance to a better rate elsewhere. If you are in this position contact us, we are happy to talk to you about the steps you can take to move to a lower interest rate.
Why Are Home Equity Loan Rates Higher Than Other Home Loans?
A Home Equity Loan rate will be higher than your lenders basic variable loan rate, and slightly higher than their standard variable loan rate. The reason for this is simple, an equity loan provides you with a limit you can withdraw up to when ever you want to - like a giant credit card. That's why they are also known as a Line of Credit. Your lender must have this whole amount available for you to access, even though you only pay interest on the balance you have already withdrawn. You pay for the privilege of having this amount of money available to you whenever you want it.
If the higher interest rates of a line of credit is a deterrent for you, talk to us about your options. Using equity in your home does not have to be via an equity loan. Standard home loans and investment loans are other ways to access your home equity.
Equity Release Loans for seniors have higher interest rates than typical Home Equity Loans. This is because in Australia Equity Release Loan customers must be over 65, typically are retired and do not have any income from employment. The loan is only paid off upon sale of the security property, moving into aged care or the death of the customer. If you would like to find out more about equity release loans for yourself or a parent contact us. Independant legal advice is required prior to anyone entering into an agremment for equity release loans in Australia.