Compare home equity loans

A home equity loan is where you use the equity in your home as security to borrow money. This may allow homeowners additional financial flexibility to meet their personal and financial goals. There are two main types of home equity loan:

Lump sum

Similar to a personal loan, car loan or mortgage, a lump sum payment uses your equity as security to borrow a large sum of money, which you’ll pay back with interest over time, at either a variable or fixed rate.

Line of credit

Similar in functionality to a credit card, this type of loan lets you borrow and repay money when you need it, up to a maximum limit based on your available equity. You’ll only be charged interest on the money you’ve borrowed.

Refinancing

If you have built up equity in your home, you may consider refinancing your mortgage to access that equity or get a lower interest rate. When refinancing, lenders often prefer borrowers with greater equity and a lower loan-to-value ratio (LVR) as they are perceived to be less risky than those with high LVRs.

Refinancing to access your home equity typically involves increasing your loan amount and being paid out the equity as a lump sum. It’s essential to carefully evaluate the terms and costs associated with refinancing before proceeding.

While you have the option to access your home equity loan as a line of credit, it’s also possible to secure a line of credit without using your home equity.

Some lenders offer lines of credit as personal loans secured by other assets, such as vehicles. Unsecured lines of credit are also available, though these tend to have higher interest rates and tougher eligibility criteria.

Depending on your loan purpose, you may prefer to access your home equity loan as a lump sum rather than a line of credit. For example, a lump sum could help you pay for a single large expense, like a wedding or buying a new car, while a line of credit could be useful if you don’t yet know how much money you’ll need for a longer-term project, such as home renovations.

Your equity in your home is the percentage of its value that you own outright, and does not have a mortgage owing on it. This includes the repayments you’ve made onto your mortgage principal (including additional repayments), as well as any capital growth your property has experienced from rising prices in your area. 

The more you can pay off your mortgage, and the more your property’s value increases, the more equity you may have in your home. 

The easy way to find your home equity is with this formula: 

Current home value – outstanding mortgage = equity

Remember that your home’s value may have changed in the time since you bought the property. If you don’t know your home's current market value, you can get an estimate by ordering a property report. Keep in mind that your lender will likely require a professional valuation as part of your line of credit’s application process.

You can find the loan balance still owing on your current home loan by checking your statements from your mortgage provider.

It’s important to remember that just because you have equity in your home, that doesn’t always mean all of your equity is available for you to use.

Mortgage lenders typically want you to hold onto at least 20% of your home’s value to keep your home's LVR under 80%. If you owe money on more than 80% of your home’s value, whether it’s through your mortgage, a home equity loan, or both, you may need to pay for a lender's mortgage insurance (LMI) policy.

Calculating your usable home equity

To find your usable equity, you can use the following formula: 

(Current home value x 0.80) – outstanding mortgage = usable equity

For example, if your home is currently valued at $500,000, and you still have $300,000 to pay off on your mortgage, you have $200,000 in equity. However, 80% of your home value is $400,000, so once you subtract the $300,000 you still owe on your mortgage, you’ll have $100,000 available in usable equity.

Depending on your financial situation, you may be able to use your home equity to access a lump sum or a line of credit to:

Purchase more property or other assets

It’s not uncommon for homeowners to leverage the equity in their home as a deposit for an investment property. By doing so, you may be able to expand your property portfolio and potentially increase your investment returns over time.

Moreover, tapping into your home equity presents an opportunity to acquire additional assets and explore various investment avenues. This could involve diversifying your portfolio by investing in stocks, bonds, mutual funds, or other financial instruments that align with your investment goals and risk tolerance.

Consolidate debts

You may be able to use a home equity loan to pay off various debts such as maxed-out credit cards, personal loans, or other outstanding obligations. Instead of juggling multiple payment due dates and amounts, you can streamline your repayment process by making a single monthly payment towards your home equity loan..

These loans often come with competitive interest rates since they are secured by the value of your home. You may be able to enjoy a lower interest rate compared to what you would pay if you were to clear each debt separately. 

Home improvements and renovations

Whether you're looking to upgrade your kitchen, add an extension, repair structural issues, or undertake any other construction project, a home equity loan can provide the necessary funds.

By using a home equity loan for home improvements, you can potentially increase the value of your property. Renovations and upgrades have the potential to enhance the functionality, aesthetics, and overall appeal of your home. This increased value can potentially help replenish the equity you accessed through the loan.

Additionally, home repairs and maintenance projects funded through a home equity loan can help preserve and protect your property. Addressing issues such as a leaky roof, faulty electrical systems, or plumbing problems can prevent further damage and deterioration. This proactive approach to home maintenance can help maintain or even increase your property's value over time.

It's important to note that while home improvements can potentially increase your property's value, the extent of the value appreciation will depend on various factors, such as market conditions and the quality of the renovations. It's advisable to carefully plan your home improvement projects, considering factors like cost-effectiveness, return on investment, and the preferences of potential future buyers.

Pay for goods and services

Home equity loans provide the flexibility to pay for a wide range of goods and services. Whether you're considering purchasing a car, funding a wedding, or planning a vacation, a home equity loan can offer a convenient and cost-effective financing option.

One common use of home equity loans is to finance the purchase of a vehicle. Instead of taking out a traditional auto loan or relying on dealership financing, you can use the funds from a home equity loan to buy a car. This can be advantageous because home equity loans often come with lower interest rates compared to many personal loans or credit cards. By taking advantage of a lower interest rate, you can potentially save money on interest payments over the life of the loan.

While a home equity loan can offer advantages such as lower interest rates, it's essential to carefully consider the repayment terms and your ability to meet the loan obligations. Failure to repay the loan could put your home at risk, as it serves as collateral for the loan.

You may be able to refinance your home loan and use your usable equity as security on a second mortgage to buy an investment property. Lenders usually grant up to 80% of your equity, depending on your ability to repay the loan. To determine this, they will assess your income, number of dependents, overall living costs, outstanding debts, and other relevant serviceability factors.

Some investors purchase multiple properties with this strategy, using the equity in one property as security to purchase the next, and so on. Keep in mind that this approach can be risky - if you find yourself unable to afford one loan, you could end up losing multiple properties.

If using a home equity loan to secure a deposit for a second home, you’ll want to ensure that the value of your loan can cover the deposit plus stamp duty and other fees and charges associated with your new property.

Consider contacting a financial adviser and/or a mortgage broker before you look at buying an investment property with your home equity.

Pay off your mortgage

The simplest way to build equity in your home is to pay off your mortgage. The more you chip away at your mortgage principal through extra repayments, the more equity you'll accumulate in your property.

With every extra dollar you put towards your mortgage, you're inching closer to fully owning your property. As you steadily reduce the loan balance, the value of your ownership stake, or equity, grows.

If you have some surplus funds or come across an unexpected windfall, you might consider directing them towards paying off your mortgage. By doing so, you're not only decreasing the amount of interest you'll pay over the life of the loan but also steadily building up your equity. 

However, it's essential to evaluate your household’s financial situation and goals before deciding on extra repayments.

Property appreciation

If you’ve been keeping up with your home loan's monthly repayments for a few years, you may find that you have more equity available in your property than you expect. This is because equity is calculated using the current value of your home - if house prices have been rising in your local area, your property may hold more value today than it did when you first applied for your mortgage.

Renovation and upgrades

You may also be able to increase the value of your home (and your home equity with it) by renovating the property. This could be as simple as replacing old fixtures or as complex as replacing the kitchen or bathroom, adding bedrooms, or even putting an extra storey on your house.

You may even be able to use money from a home equity loan to pay for renovations. If they help increase your home’s value, you may find you have more equity available in the future to borrow more money when you need it. Just be mindful of renovation risks, such as overcapitalising. This is where the cost of the improvements is higher than the potential increase in value.

Although Australia’s property market has proven resilient over the years, accessing the equity in your home can be a risky venture. It is crucial that you examine the market and your personal financial situation before you proceed with a home equity loan.

Negative Equity

There is no guarantee you have equity available, particularly in a higher-rate environment or harsher property market. If your property’s value has declined, you may be at risk of having negative equity. This is where the outstanding loan balance exceeds the value of your home.

This can make it difficult to sell your property or refinance in the future, let alone access a home equity loan. It may be worth performing a free property value assessment before proceeding. 

Increased debt

Taking on a home equity loan can add to your overall level of debt. If you refinance to access the equity in your home, this will typically involve increasing your loan amount by the funds you wish to access. 

If you are already struggling with existing debts, such as credit card debt or personal loan repayments, adding a home equity loan may add additional financial pressures to your household. It's important to assess your ability to comfortably repay the loan before taking on more debt.

Financial risk

If you’re taking out a home equity loan for investment purposes, there is no guarantee that this will be profitable. For example, if you use the equity in your home as the deposit for a new investment property, you expose yourself to risks including a potential decline in property value, rental issues, bills, maintenance and other ongoing costs.

You can do your own research on home equity loans by sourcing information from various lenders and financial institutions, though that may take a long time and require more effort.

A comparison site like RateCity allows you to view a wide range of home equity loan offers side by side, including comparison rates, and provide filters to narrow down your shortlist to just the home equity loans that suit your financial needs.

While you may expect a mortgage broker to be mostly concerned with home loans, these mortgage experts can also assist you with refinancing your current mortgage to access a home equity loan. If you want to use your equity to buy an investment property or second home, these home loan experts can help you manage this process as well.

A mortgage broker can help you on every step of finding and applying for a home equity loan, from calculating your approximate usable equity to negotiating with the lender to help you get a better deal.