What are the benefits of home equity loans?
Home equity loans ultimately offer homeowners with financial flexibility. There are a number of benefits associated with accessing the equity in a property, such as:
- Access to a large amount of money when needed
- Pay less interest compared with other loans e.g. credit cards and personal loans
- Using the money to renovate can increase the property’s value
- Can use the equity as a deposit to buy a second property
- The interest can be tax deductible for investors
What are the risks of home equity loans?
In order to make an educated financial decision, you should be aware of the risks associated with accessing the equity in your home. These can include:
- An increase in the amount of debt owed
- It will take longer to repay the home loan
- Larger repayment amounts
- Potentially higher interest rates
- Temptation to use the money for other purposes
- Homeowner risks losing the property if they are unable to make repayments
- May need to pay fees such as break costs, a valuation fee, legal costs and if you borrow more than 90% LVR you may need to pay LMI (Lenders Mortgage Insurance)
Can I get a home loan top up?
A top up loan, also referred to as an ‘equity loan’ or a ‘cash out loan’, allows homeowners to access the equity accrued in their property in the form of a cash sum. Lenders typically allow property owners to borrow up to 80% of their property’s value. It’s important to note that accessing equity is likely to increase the loan term, meaning it will take longer to pay back your loan in full.
While the equity accessed can be used for any purpose, the lender will typically request evidence for the loan’s purpose if the borrower requests to access $100,000 or more.
Is a top up loan right for you? Learn more about top up loans here.
Can I get a line of credit home loan?
This will depend on your personal circumstances, your current equity and your property’s value. A line of credit home loan allows a property owner to borrow a specific amount of money from their home loan. The funds can be accessed by the borrower as often as they choose as long as they don’t exceed their limit.
The lower your LVR, the better your chances of being approved for a line of credit loan since lenders will usually only allow homeowners to borrow up to 80% of their property’s value. Line of credit loans are typically used by individuals with inconsistent income streams such as investors, the self-employed, tradies, etc.
Can I use my home equity to fund renovations?
It all depends on your personal situation. If you have a significant amount of equity in your property, you can apply for an equity loan to pay for your renovations. You can typically access up to 80% of your current property’s equity. How much equity you can access will vary and is dependant on how much of your loan you have already repaid, how much your property is worth and the current property market conditions.
If you are using a licenced contractor for the valuations, you could get a construction loan to fund renovations, the bank will then use an ‘as if complete’ valuation of the property to determine your equity.
Thinking of buying a fixer upper? Read more about construction loans here.