These home loans offer low costs, coupled with a host of features, giving the best overall value.
7+
Great
These home loans may have slightly higher interest rates or fewer features but overall, a competitive offering.
5+
Standard
Usually the home loans would offer above average rates. They may still include some competitive features.
0+
Basic
Higher costs and/or fewer features.
Key takeaways
Your equity is the amount of your property you own considering how much of the property value you've paid off through your deposit and loan.
You can borrow money using your home equity to use for any purpose.
Ways to borrow against your home equity include line of credit home equity loans and refinancing to borrow more money.
What is a home equity loan?
A home equity loan is a way you can borrow money by using the equity you've built up in your home. You can either do this by refinancing your home loan to borrow more money or by taking out a line of credit.
Your equity is the amount of your home you own. You can work it out by looking at the value of your property and subtracting your outstanding loan value.
You can usually take out a home equity loan value of the amount of equity you have up to 80% of the property value.
Let's take a look at a very basic example:
If you have a home worth $800,000 and you have $400,000 left to pay on your home loan, you have 50% equity. To borrow back up to 80% that means you could get a loan of $240,000.
Another option is a home equity line of credit, which many banks will use the term home equity loan for. These can be more costly options and are less used for personal use.
Expert insight: Releasing equity can be low cost borrowing
"Releasing equity is one of the cheapest ways of borrowing money as it's home loan interest rates with minimal fees. I help borrowers release equity for all types of reasons: home renovations, debt consolidation, health expenses, buying a car, investing into further properties or shares. I encourage borrowers to regularly check their interest rate against the market, however this is a great time to check your rate as the equity release process is a full application as if you're going for a new loan."
Raj Ladher
Senior mortgage broker, Equilibria Finance
Types of home equity finance
Home equity loan: A home equity loan is a lump sum loan that you take out separate to your home loan, but using your equity as security. This means you'll have separate repayments to your home loan.
Line of credit equity loan: A line of credit equity loan is a credit facility, which kind of works in the same way as a credit card. You have the credit available to use as and when you need it.
Cash out refinancing: This is where you completely refinance your home loan, but borrow more money with the lender. This means your repayments will increase, but you'll just have the one loan to repay.
How much does a home equity loan cost?
A home equity loan usually comes with interest rates of around 7% to 9%. This is more than standard home loans typically cost.
If the amount you want to borrow takes your total borrowing above 80% of the property value, you may also need to pay lender's mortgage insurance.
There can be establishment fees associated with home equity loans.
Pros and cons of a home equity loan
Benefits
Ease of access. Because you already have equity in the home, you're likely to be approved easily.
Flexibility. You can use a home equity loan for any purpose, from debt consolidation, to travel, to a new house deposit.
Features. Like home loans you can usually take advantage of additional features like extra repayments.
Payment structure. Home equity loans often give you interest-only repayment options to better manage your money, if that works for you.
Drawbacks
Difficult to manage. Because a home equity loan is a separate loan to your home loan, you'll have more than one repayment to manage.
More money lost to repayments. Having an additional repayment to make means you're using more of your income each month on repayments.
Security. Your property is used as security, so if you fail to meet the conditions of repayment you could lose your home..
Equity loss. By borrowing against your equity you're losing the equity that you have in the home.
How to compare home equity loans
As with any loan there are some key areas to focus on when you compare:
Interest rate. The lower your rate the lower your repayments.
Fees. The fewer the fees, the better.
Borrowing amount. You need to calculate how much equity you have in the home to see how much you would be approved to borrow. You should calculate not only how much you can borrow but how much your repayments would cost.
Loan term. Home equity loan terms are usually shorter than home loans, but longer than personal loans. Loan terms can vary between lender and equity loan type.
Frequently asked questions about home equity loans
Because you're using the equity you have in your home loan as security, you could lose you property if you're unable to repay. This may also affect your mortgage so you should speak to a qualified professional about the risks and repercussions.
How much you'll be able to borrow with a home equity loan depends on the amount of equity you have in the property. Typically though, you can borrow the difference between your equity and 80% of the property value. For example, if you have 50% equity in your home (you've paid off half the value), you can borrow 30% of the value so that your LVR doesn't go above 80%.
Some lenders will allow you to borrow more but you'll need to pay lender's mortgage insurance (LMI) which can cost thousands.
A home equity loan can be used for any purpose. That includes:
Debt consolidation
Holiday
Home renovations
Medical expenses
Home loan deposit for a new property
Yes, you can use a home equity loan as a deposit for another property. Banks and lenders will usually accept this as genuine savings, unlike if you were to use a personal loan.
Rebecca Pike is Finder’s money editor, with over 7 years of experience in mortgages and personal finance. A frequent TV and radio commentator, she frequently appears on Sunrise and 7News, Today and 9News, as well as Sky News, Channel 10 and across radio and print. Rebecca previously served as Editor of Mortgage Professional Australia. She has a Master’s degree in Journalism as well as ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products, which comply with ASIC guidelines.
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