Home Equity Loans

All your home equity loan questions answered here.

A guide to Home Equity loans

Many homeowners often focus on how much of their home loan they still owe, rather than thinking how much equity they have built up.

So when it comes to needing a loan, they often forget that they have essentially saved a large portion of money that they may be able to access through a Home Equity loan.

But what is a Home Equity loan and where can you turn to for advice about whether they’re a good option for you? Fortunately, the brokers we work with are experts when it comes to home equity loans and will help you find the best deal.

To give you all the information you need, we’ve created this guide which includes:

If you would like to talk to someone today about Home Equity loans, click here.

We’ll only ever put you in touch with a specialist who can provide bespoke Australian mortgage advice.

What is a Home Equity Loan?

A Home Equity loan is a type of loan that is secured against your home.

Most homeowners use the funds to make home improvements but the loan can also be used to purchase a second property or to just enjoy for travelling or a holiday.

There are two types of financing options when it comes to Home Equity loans.

The first allows you, as the borrower, to receive your loan as one lump sum.

The second, allows you to access ongoing funds that are available to withdraw over time. This is known as HELOC (Home Equity line of credit.)

Is a Home Equity loan a second mortgage?

There are similarities between a Home Equity loan and a standard repayment mortgage, the first being that both types of finance are loans that are secured against your home.

Your ability to take out a home equity loan is largely based on your ability to repay it and to determine this, most lenders will look at your income, credit history and outgoings, among other affordability factors.

It also depends on how much equity you currently own in the property, although issues regarding the above mentioned factors can limit your choice of lenders.

How do Home Equity loans work?

There are two types of equity loan.

The first is where you can take the loan as a lump sum and the lender adjusts (increases) the repayments over the period of the loan accordingly

The second is where you establish a line of credit. You are approved to borrow up to a predetermined limit, whereby you can borrow what you need, when you need it (subject to the limit) and repayments are adjusted depending on how much you borrow.

A Home Equity loan is calculated by the value of your home minus the amount you owe to your initial home loan lender.

For example, if your property is valued at $500,000 and you owe $100,000 on your mortgage, your potential Home Equity loan could be $400,000.

While policies differ between lenders, most will lend up to 80% of the homes loan to value (LTV). Quite a few will be prepared to loan higher than 80%, but you may be required to take out lenders mortgage insurance (LMI).

That being said, the amount you can borrow depends on many factors, which can vary heavily between lenders.

What affects how much I can borrow?

The amount of equity you own

Most lenders require applicants to own at least 20% equity on their property but usually the more equity you own, the larger the amount you can borrow.

Encumbrances on your property

An encumbrance can restrict your ability as the homeowner, to transfer titles or deeds to the property. An encumbrance could also include restrictions regarding licenses.

This can sometimes lessen the property’s value which can make lenders uneasy about lending.

How can I calculate how much I can borrow?

Because the amount you may be able to borrow can vary so much between lenders, a “one size fits all” quote just wouldn’t be accurate.

To truly understand how much you can borrow and why, speak to one of the home equity advisors e work with who specialises in Home Equity loans.

We have helped a lot of people who have previously used online calculators and then come to us for an estimation that accurately reflects their circumstances.

A home equity advisor can go through your finances with you and look at each lender’s differing criteria to calculate how much you could borrow with each.

Not only does this make thinks a lot clearer but it also filters out the lenders that wouldn’t be a good fit and highlights those that offer the best deals.

How long does it take to get a Home Equity Loan?

One of the benefits of a Home Equity loan is that they can be processed fairly quickly in comparison to a traditional Home loan.

In fact, usually, the time it takes from application to approval, to completion is between 2-4 weeks.

During this time frame, the lender will process the application and check any documents to confirm that you meet the lending requirements for the new debt.

How do I pay a Home Equity loan back?

The money you borrow on a Home Equity Loan is paid back in regular instalments until it is repaid.

In fact, a Home Equity loan can be absorbed back into a mortgage agreement as part of a refinancing arrangement, in some circumstances.

Can I get a Home equity loan to buy a second home?

In some circumstances, it may be possible to find a lender who is prepared to offer you a Home Equity loan for the purchase of a second home.

In most cases, lenders will require you to own a substantial amount of equity before they agree to lend to you for this, as a larger loan exposes the lender to a greater risk of losing money.

To establish the likelihood that you will repay your loan, most lenders will also want to check your credit history. If there have been instances of non-payments or late payments, this can cause concern for lenders and they may be less likely to lend to you.

For more information on how your credit history can affect your ability to take out a Home loan or Home Equity loan, see our bad credit information section here.

Where can I get the best rates?

With such a huge financial decision to make, you want to be sure that the loan you take out has the best interest rate and is affordable for you.

But with so many lenders to choose from, deciding which Home Equity loan company to borrow from can get a little overwhelming.

The home equity advisors we work with will have access to hundreds of lenders and can take the time to carefully compare the pros and cons of each loan.

Because they’ll have experience with Home Equity loans, they’ll be able to quickly identify any issues with contracts and the terms of the loan agreement.

Not only can this help to save you money, but it can also speed up the process and save you the work of researching each lender.

To find the best interest rate for a Home Equity loan, speak to specialist here.

Can I find a lender to approve an Equity Home Loan?

Every lender will have their own set of rules and criteria that they use to determine whether they’ll approve you for a Home Equity loan, so even if you have been rejected by one lender, it doesn’t necessarily mean you’ll be rejected by all of them.

Applying to multiple lenders can affect your credit history, so be cautious and do your research before you apply.

To avoid negative marks against your credit file, it’s best to speak to a mortgage advisor who can find the lenders who are most likely to approve you.

Speak to a home equity expert today

Before you decide to apply for a Home Equity loan, it’s important to speak to a professional who can help you to establish whether this type of finance is the best option for you.

Talking to one of the expert brokers we work with can help to resolve any questions you have about the loan and how it could affect your financial situation, including any benefits you currently receive which may stop depending on the amount of loan you apply for.

We don’t charge a fee and we won’t leave marks on your credit rating.

Alternatively, if you have any questions about Home Equity loans, make an enquiry here.