Types Of Equity Loans
As a general rule equity loans are used when you are releasing equity from your home to buy shares, buy a property, renovate or consolidate debts. In these cases you may use a 100% offset home loan or Line of Credit.
There are however several other types of equity loans such as a shared equity loan, property share loan, or seniors equity loan which is also known as a reverse mortgage. Read on to find out more about how these types of loans work and when they should be used.
Shared equity loan
A shared equity loan is simply where part of the loan has no interest on it, however in return the bank takes a share of the capital gains when you sell the property or refinance the loan.
So for example if you buy a home for $500,000 you may get a loan for $400,000. Of this $100,000 (or 20%) may be an interest fee shared equity loan or equity finance mortgage. If the property is sold the lender may take 40% of the capital gains. So if you sold for $600,000 then the lender would take $40,000 (40% of the $100,000 gain).
The benefit of this type of loan is that there are no repayments on the shared equity portion so you are able to borrow much more than you would with a normal home loan and can own a larger home. This may also be useful if you believe that capital gains will be minimal in the next few years.
Property share loan
A property share loan is used when two or more friends decide to buy a property together. This allows them to have separate loan accounts which are in their own names, all secured by the one property.
For example if John and Adam decide to buy a $500,000 property together however John’s deposit is $100,000 while Adam’s is only $50,000 then they may decide to have different loan sizes. John could have a loan of $150,000 while Adam would have a loan of $200,000. They would then both be contributing to 50% of the property value with either their deposit or loan.
In all cases when friends buy a property together their loans will be guaranteed by each other. In the above example if John was to miss his payments then the bank could call on Adam to make the payments instead. For this reason you must be careful as to who you buy a property with.
Seniors equity loan
Seniors equity loans are also known as a reverse mortgage. They enable a retired person to release the equity from their home either as a lump sum or in regular instalments to help them fund a better lifestyle in their golden years.
There are no repayments with this type of loan as the interest is added onto the loan each month. The loan is repaid when the property is sold or from the borrowers estate.
Care must be taken with this type of facility as often this loan will use up most of the borrowers equity which will reduce the size of their estate to be passed onto the next generation. We always recommend that you seek independent legal and financial advice regarding the loan and also inform your next of kin of your decision to take out a loan using your equity.
Line of Credit or 100% Offset?
Did you know that most banks set people up with Line of Credit equity loans even though they are difficult to manage and more expensive? Although we’ve listed below the common loan products people use when releasing equity we actually believe that in most cases a 100% offset home loan would be more suitable.
If you need help choosing the right equity home loan then please call us on 1300 889 743 or enquire online to discuss your situation with one of our specialist mortgage brokers.
CBA Viridian Line of Credit
CBA‘s Viridian LOC is a relatively unique product in that it has no set term or requirements to pay off the principal. As long as you keep repaying the interest, fees & charges then you are meeting your obligations under the loan.
While this means that the loan is suitable for investors, it can cause significant problems for anyone who has trouble managing their money or who does not have a clear strategy to repay the debt.
ANZ Equity Manager
We consider the ANZ Line of Credit to be too expensive when compared to other options such as an offset mortgage or the Line of Credits offered by other banks. ANZ charges a premium on the interest rate in return for the added features and flexibility of this product.
There is no set repayment schedule or term for this loan, it really is like a giant overdraft and as a result it has the potential for mismanagement & misuse. We would usually only recommend this type of product for a sophisticated investor.
St George Portfolio Loan
The St George Portfolio Loan is a type of equity home loan with the features of a Line of Credit. Unlike some other facilities the Portfolio loan requires that the primary loan account has a repayment made on it each month that at least covers the interest & fees charged.
One of the advantages of the Portfolio loan is that you have have up to 10 different sub-accounts all in different borrowers names & for different purposes. You can change the setup & limits of the accounts without going through a full credit assessment process. This great flexibility comes at the cost of a higher interest rate.
Westpac Equity Access Loan
Westpac’s Equity Access Loan or EAL is a flexible revolving line of credit product that can be combined under Westpac’s Premier Advantage Package to receive a better rate discount. With this loan you have the option to not make any repayments, as long as your loan remains under the limit.
This is useful for investors or other people that have irregular income sources. You can let the interest add on to the amount owing each month until you receive your next dividend or sell your next property. As with all Line of Credit loans this loan has the potential to be mismanaged if it is chosen by someone who is not financially sophisticated.
Although a Line of Credit initially appears to be a good option there are many hidden problems with these loans types that lenders do not disclose to their borrowers up front:
- The lender has the right to cancel your unused limit at any time. We have seen several major banks do this during the Global Financial Crisis of 2009.
- Some loans do not have a set term or end date. Because of this unless you actually make additional repayments then you will never pay it off!
- Some equity loans require a repayment each month whereas others do not. Even if you have made more than $100,000 in additional repayments but then you do not make any repayment the next month then the lender will deem your loan to be in arrears and freeze your loan account, leaving you unable to access your redraw until you make a repayment on the loan!
Research the loan you are going with carefully to be sure that the features, terms & conditions and interest rate are all competitive and suitable for your needs.
Apply for an equity loan
Our mortgage brokers are specialists in all types of equity release loans. We can quickly work out the best options for you and then help you to get a speedy approval.
Please call us on 1300 889 743 or enquire online and one of our mortgage brokers will call you to discuss your enquiry.