Thinking about buying an additional property? Or maybe you need some funds to renovate your home? You may be able to use a home loan to use available equity in your property.
In this article we’ll explain what equity is and how you can use it, and some of the differences between taking out a regular home loan versus using a home loan to access your equity.
What does equity mean?
Essentially, equity is the amount of your home that you own. It is the difference between the value of your home, and the amount you still need to pay off. You can use the equity you have built in your home in a variety of ways, including to take out a home equity loan.
How is home equity calculated?
To avoid Lender’s Mortgage Insurance, most lenders will allow you to borrow up to 80% of your home’s value. To calculate your home equity, take 80% of your home’s value, and subtract the amount of your loan that you haven’t paid off from it. This will give you the amount of equity you have built up!
Why don’t we run through a quick example?
If your home is valued at $700,000, 80% of that would be $560,000. This is the maximum that we can borrow for a home loan. Let’s say the outstanding balance on your loan is $250,000. If we take away $250,000 from $560,000, we are left with $310,000, which is the amount of your loan that you have paid off, known as your home equity.
This is a general rule, but if you are interested in accessing your equity reach out to your lender, as they may have a different way of calculating equity.
How can you use a home loan to access available equity in your property?
Use a home loan to access available equity in your property can be used for a variety of reasons, but it is often used as an investment opportunity. For example, you can use a loan to renovate your home, which could increase your home’s value. Accessing your equity could also be used to purchase an investment property or, if you have a child, it can even be used to assist them in buying their own home through a family guarantee system.
While you may be able to use your equity for other purposes, such as buying a car or consolidating debt, this can be risky. We’ll explain some of the risks associated with an equity home loan further below.
How is a home loan different?
Home loans and accessing your equity may sound similar, but there are some differences between them. If you already have a home loan, a home loan to access your available equity will generally be established as another loan with its own repayment. Therefore, you will need to consider that you will have two loan repayments in this example. If you own your home, you can also apply for a home loan to access your equity.
Like any loan, though, there are some things you should consider before taking out a home loan to access your equity. Compared to a regular home loan, the interest rate on a loan to access your equity is often higher, and you won’t usually have the option to switch from a fixed rate to a variable rate, or vice versa.
Another major consideration is that you'll have two separate mortgages and two separate repayments to keep track of. Because of this, it’s important to carefully consider what you are using your home equity for. Using it to invest back into your home or into another property may be less risky than using it for something that won’t see a return, like buying a car.
If you wanted to compare some of your options, check out our guide on refinancing while accessing equity.
Steps to accessing equity in your home
If you’re thinking about using a home loan to access the available equity in your property, here are some initial steps you can follow to get prepared:
1. Create a plan or budget
Just because you can borrow the maximum amount of equity available, doesn’t always mean you should. Be sure to consider what you’re using your loan for, and only borrow as much as you need. Having a plan and a budget can save you a lot in the long run, so make sure you do your research.
If you’ve decided to use a loan to renovate, you can use this time to do some research and get some quotes, so you know how much you’ll need. If you’re thinking about buying an investment property, you can check out this guide we prepared that’ll help you get started with your plan.
2. Find your home’s value
When calculating equity, lenders use the market value of your home, not what you paid for it. Your home’s value may have changed since you bought it, which is important to know. If your home has increased in value since you’ve bought it you’ll likely have more equity at hand, but if it has decreased you won’t be able to borrow as much.
This may also be a good time to look at house prices in your area to see if they’ve been generally going up or down over time – if you take out an equity home loan and your home’s value steadily decreases, you may end up owing more on your home than its worth which can result in ‘negative equity’.
3. Reach out to your lender
If you have further questions or are ready to proceed, the next step is to talk to your lender. They may be able to help you calculate your equity or value your home if you haven’t already, and answer any further questions you may have.
Here at Greater Bank we offer home loans to access the available equity in your property, so if you were interested in finding out more you can meet with a lender at one of our branches, or contact a mobile lender who can visit you at a convenient time.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.