What Is A Home Equity Loan?
A home equity loan allows you to borrow against the equity you have in your home to invest in shares or property, repay your debts, renovate or pay for lifestyle expenses.
Until recently, house prices have risen rapidly across most of Australia, giving homeowners a readily available and inexpensive source of credit. Using your home equity to expand your investment portfolio could be one of the best ways to earn passive income in Australia right now.
Our popular articles on home equity loans
How much do you have and why does it matter?
How much equity can I release?
Are you eligible for a rate discount?
What Can I Use My Equity For?
You can use your equity for any worthwhile purpose, such as:
- Buying another property.
- Buying a business or investing in your business.
- Investing in stocks, shares or managed funds.
- Consolidating your debts, such as credit cards or 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, although there are select lenders that will allow you to refinance to repay a debt to the ATO. Please call us on 1300 889 743 or enquire online if you are not sure if your loan purpose will be accepted.
Is An Equity Loan Suitable For Me?
We recommend that people take out a home equity loan only 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 for how to pay the money back.
As a general rule, it is cheap to release equity up to 80% LVR (80% of your property value), minus what you owe on the property. There are some lenders that will allow you to release up to 90% LVR, minus what you owe; however, you will need to pay a one-off LMI premium. You must refinance your existing loan as part of the equity loan application.
Frequently Asked Questions
We can help you compare the available professional packages, basic loans and line of credit loans available to ensure you get the lowest possible rate and fees.
The banks prefer to set up 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, 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.
Why Don’t Banks Usually Approve Cash Out For Equity Loans?
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.
While lenders do not have strict policies for equity loans without cash-out, for cash-out equity loans, the majority of lenders have a cash-out policy that restricts the amount of money that you can release to as little as $10,000-$50,000. Not every lender has cash-out restrictions.
You can learn more about taking a regular home equity loan vs a cash-out loan at our page on the topic, home equity vs cash out.
Three Tips For Your Equity Loan
Beware of Line of Credit loans: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 may be 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 can end up in a cycle of spending and consolidating which will 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.
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.
Low-Doc Equity Loan
Releasing your equity with a low-doc loan is particularly difficult as lenders do not have evidence of your income or what you are doing with the 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.
Most lenders these days will not require you to submit tax returns or financials if you sign a declaration confirming your income.
The lender can then assess your loan using the declared income.
Although most lenders do not charge a higher rate for low doc loans they may charge you Lenders Mortgage Insurance (LMI) as a one off fee when the loan is set up.
This fee is usually charged for loans over 60% of the property value.
Consolidating Debt With Equity Release
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%-30%, and for personal loans the rate can be anywhere from 9%-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, copy of a plan or Statement of Advice from a financial planner.
- Buying a property: A letter from your conveyancer confirming you are looking for a property or a copy of the Contract of Sale if you have found a property.
- Debt consolidation: One recent statement for each debt you are repaying.
- Renovations: A copy of the building contract or quotes from the contractors that you are using.
Will this be a problem for you? If yes, 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.
Apply For A Home Equity Loan
Please enquire online or call us on 1300 889 743 if you wish to talk with one of our mortgage brokers who specialises in releasing equity.
We can work out which lender on our panel will approve cash out for your situation and then help you to find the right home equity loan for your situation.