How does a personal loan work when you secure it with equity?

Secured personal loans can be a great way to help you take your next step, whether it be to a new car, to home renovations or to any other large purchase. While car loans are the most common type of secured personal loans, a vehicle isn't the only way to guarantee a loan. If you own your own home and have built up some equity in it, you can use that equity as a guarantee on your next loan. Find out how this works in this guide.

How does a personal loan work when you secure it with equity?

A loan secured against your home works in the same way as other secured personal loans. When you apply you will need to provide details of your mortgage, your personal financial position and the reason you're taking out the loan. Your application will be assessed and if approved, you will be given a loan based on how much equity you hold and how much the lender thinks you can afford to repay.

Working out your equity

Home equity is essentially the difference between your property's value and any debt you hold against it. Typically, you'll be able to borrow up to 80% of your home's value minus the debt you hold against it. For example, if your home is worth $500,000 and you've paid off $300,000, you'll have $200,000 left on your mortgage. Here's how much you'll be able to borrow on a personal loan in that scenario:

• 80% of a $500,000 home = $400,000
• The amount of debt on the property = $200,000
• Value - debt = $200,000

Do you need to apply with the same lender as your mortgage?

No, you don't. However, your lender may have secured personal loan options that allow you to use your home equity as a guarantee that you might want to consider. If you decide to apply with a different lender you will need to provide details of your mortgage, including your total loan and how much equity you hold.

The types of loans available when using your equity give you real flexibility:

• Secured personal loan. This loan is secured to the amount of equity you hold but can be used for any purpose. it is given to you in a lump sum and you pay it back in instalments, usually over a period of one to seven years. As the loan is secured you can enjoy a more competitive rate.
• Line of credit loan. As a continuous source of credit, you can draw on this loan as and when you need to. You'll have access to the amount of credit that you're secured for and be required to make regular repayments, and as you repay the credit it will become available again. The term for this kind of loan is usually ongoing.

Find out about investing in property with a home equity loan

What kind of purchases and investments can you make with an equity-secured personal loan?

While the loans themselves are secured, there aren't many restrictions on how you use your loan. You can use the money for:

• Home renovations
• New and used car purchases
• Holidays
• Large purchases, such as furniture

What are the features of this type of loan?

• Competitive interest. Your loan is secured by a valuable and appreciating asset, your property, so you will usually get a competitive interest rate.
• Flexible loan purpose. You can usually use the loan amount for whatever purpose you need.

Is there anything to consider before applying?

This is a risky type of loan should you default. If you fail to repay the loan the lender may be able to sell the property to pay the loan. Before you apply, consider how financially stable you are and if this is the right type of loan for you to take out.

A personal loan secured by your home equity can offer you a low interest rate as well as a flexible way to finance a personal purchase. However, as there are risks involved, remember to consider all of your options before you apply.

Picture: Shutterstock

Elizabeth Barry

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Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at The Lizzies. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).

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