Home equity loans

What is a home equity loan?

A home equity loan allows you to borrow against the equity you have in your home to either invest in shares, repay your debts, renovate, pay for lifestyle expenses or buy another property. The loan is secured by a mortgage over your home and in most cases you can use as little or much of the loan, if and when you need it.

Equity loans have been very popular in recent years, due to their flexibility. House prices have risen rapidly across most of Australia, giving home owners a readily available and inexpensive source of credit.

Why don’t banks approve “cash out”?

The major banks are cautious when approving equity loans, in particular when they have little evidence of what you are doing with the money. This is because there are a small number of individuals who do not use their equity responsibly or do not use the funds for the purpose they tell the bank.

The majority of lenders have a “cash out policy” which restricts the amount of money that you can release to as little as $10,000 to $50,000! Thankfully, not every lender has cash out restrictions. Our mortgage brokers are credit experts and specialise in helping you to release your equity in a responsible way. Please enquire online to speak to an expert.

What can I use my equity for?

You can use your equity for any worthwhile purpose such as:

• Buying another property.
• Buying a business / investing in your business.
• Investing in stocks / shares / managed funds.
• Consolidating your debts such as credit cards / personal loans into your home loan.
• Buying a new car or boat.
• Renovating your home.
• Helping to pay for a holiday, wedding or medical expenses.
• To keep funds on standby for when you take maternity leave.

The loan cannot be used for illegal purposes or to repay a debt to the ATO. Please contact us if you are not sure if your loan purpose will be accepted.

Is an equity loan suitable for me?

We only recommend that people take out a home equity loan if they are disciplined in the use of their money. Unfortunately, some people who apply for home equity loans end up spending the money on lifestyle expenses and have no plan of how to pay the money back.

As a general rule, it is very cheap to release equity up to 80% LVR (80% of your property value). There are some lenders that will allow you to release up to 90% LVR, however you will need to pay a once off LMI premium. You must refinance your existing loan as part of the equity loan application.

Releasing your equity can be a double edged sword. Please discuss the suitability of this type of loan with one of our mortgage brokers before you proceed with an application.

Is a Line of Credit the best option?

The banks prefer to setup people with a Line of Credit (LOC) as the interest rate is higher than that for a standard home loan. We usually recommend a 100% offset home loan instead, as the features are similar however the interest rate is comparatively lower.

In addition to this a 100% offset home loan makes it easier for you to manage your money. You can keep your available funds either in redraw in the home loan or in the offset account which allows you to separate your day to day spending from your available equity.

Consolidating debt

One of the most common reasons that people release their home equity is to roll all of their expensive unsecured debts into one low monthly repayment.

The interest rate on credit cards ranges from 10% to 30% and for personal loans the rate can be anywhere from 9% to 15%.

By consolidating these debts into your home loan you can significantly reduce the ongoing repayments and save a small fortune in interest.

If you wish to consolidate your debts with a major lender you must have made all of your repayments on time in the last month for your unsecured debts and on time for the last six months for your current home loan.

Please enquire online or call us on 1300 889 743 to speak to one of our mortgage brokers who can assist you in getting approval.

Proving the purpose of your loan

As part of the application process you may need to prove the purpose of your loan. This requirement varies depending on the lender you choose, the amount you need and the purpose of your loan. Some examples of the evidence you may need to provide are:

• Buying shares: An accountant’s letter or copy of a plan / statement of advice from a financial planner.
• Buying a property: A letter from your conveyancer confirming you are looking for a property / a copy of the contract of sale when a property is found.
• Debt consolidation: One recent statement for each of your debts that are being repaid.
• Renovations: A copy of the building contract or quotes from the contractors that you are using.

Will be a problem for you? If so, please contact us as we can help you to apply with a lender who does not require extensive evidence of the purpose of your loan.

The three golden rules of equity

Beware of Line of Credits: Because you can access your equity via any ATM, it can become increasingly difficult to spend responsibly. If you feel that this may cause you future financial problems, then consider a 100% offset home loan instead.

You should only consolidate debt once: If you need to consolidate debt more than once in your life then the problem isn’t the loans, it is your spending habits. Once you have completed a debt consolidation loan then do not apply for any more credit cards or personal loans. If you do, you’ll end up in a cycle of spending & consolidating which can only result in you losing your equity. In extreme cases people continue to borrow to fund their lifestyle right up until they reach retirement age, yet are unable to retire as they still have a mortgage.

You can’t release equity that you don’t have: We often receive calls from people who have just purchased a home and want to release equity. If you only purchased your home in the last year or two then it is unlikely that you have any equity to release. You can calculate how much equity you have on our home equity page.

Low doc equity loan

Releasing your equity with a low doc loan is particularly difficult as lenders do not have evidence of your income and neither do they have evidence of what you are doing with your loan funds. You can release equity with a low doc loan for up to 60% of your property value. Releasing up to 80% is possible with a few select specialist lenders at a higher interest rate.

Interest rate & fees

You don’t have to pay a higher interest rate for a home equity loan. The secret to getting a competitve loan is to shop around. The banks tend to overcharge for Line of Credit loans and also to be very strict in their approval criteria.

We can help you to compare the available professional packages, basic loans and line of credit loans available to ensure you get the lowest possible rate & fees.

Apply for a home equity loan

Please enquire online if you wish to talk with one of our mortgage brokers who specialise in releasing equity. We can work out which lenders will approve cash out, for your situation and then help you to compare the best loans available.