When talking about homes and property, the equity in your home is the gap between its value and the outstanding loan you have on it. This is capital that is not generally available unless you sell. However, if you have need for this money, a home equity loan can be used to release this value.
What Is A Home Equity Loan?
There are numerous reasons why you might want to use the equity locked away in our home, the most common of which include:
- Purchase a car, boat, bike, plane, etc.
- Renovate your home
- Build an extension on the home
- Purchase Shares
- Deposit for another home such as an investment property
- Consolidate debt
- Pay a tax bill
- Starting a business
If you are using a home equity loan for investment purposes (e.g. to invest in property), then it may become tax deductible.
However, some banks will place restrictions on the reasons for approval of a home equity loan: if buying shares with the proceeds, for example, you may have to present a financial and investment plan prepared by a qualified financial planner.
How Do I Calculate The Equity In My Home?
It’s easy to calculate the equity available in your home. The first step is to get a valuation, and then simply subtract the outstanding loan amount. For example if your home is worth $400,000 and you owe $150,000, your equity in the home is $250,000.
However, whatever the equity calculation, you won’t be able to borrow the entire amount. The lender will err on the side of caution and want a buffer in case the market falls or you default. Most banks will loan up to 80% of the value of your home. In the above example, you’d be able to borrow up to a value of $320,000 (80% of $400,000) – after deducting the outstanding home loan of $150,000, you will actually be able to borrow $170,000.
Some of the lenders we use will lend up to 90% of the value of your home (though mortgage insurance will then be payable, but can be added to the home equity loan).
Advantages Of A Home Equity Loan
There are many advantages of home equity loans. The most common are:
- Lowest interest rates in comparison to car loans, personal loans or other types of finance
- Longer loan terms – some up to 40 years
- Can be structured to access as much of as little as you need so you only pay interest on what you use
In summary a home equity loan allows you to access the cheapest finance available on the terms you prefer. You choose how you use the funds giving you greater flexibility and control.
Different Types Of Home Equity Loans
There are different methods to access equity in your home.
The traditional method which is applying for a lump sum and extending your current mortgage. The disadvantage is that interest is payable on the whole amount from day one: if you plan to use the money immediately this is not a problem, but if not then there are other home equity loan options.
A line of credit facility operates similar to a credit card. You can draw down on the loan when you need to, and thus only pay interest on the amount used and you have immediate access to the funds when you need them.
Finally, you might consider creating a new loan with a redraw facility. This way you obtain the benefits of only paying on what you take out but generally benefit from a lower interest rate.
Finding The Best Home Equity Loan
What is best for you depends on a number of factors and why you want the loan. Here’s how we will help you make the decision:
- Evaluate your current situation and narrow down the options based on the loans that are suitable for your personal circumstance e.g. self-employed, short term employment, type of loan needed, rural area etc.
- Profile the lenders and their credit policies, review their interest rates, fees, and other charges and compile all results in a lending comparison report
- Decide upon the correct loan structure based on the lender selected, flexibility offered, and financial control you require
Contact us today, and we’ll help you discover how to unlock the value in your home for whatever reason it’s needed.