Uses for home equity loans
You can use a home equity loan for a variety of purposes, including:
a deposit on an investment property
Many lenders will require you to have at least a 20% deposit when buying an investment property. Instead of having to save and come up with that deposit, you can unlock the equity you have in your home instead.
renovating your home
Most people find that their housing needs change over time. For example, when couples have children. Renovating your home to make it bigger can be a preferable and cheaper alternative to selling your home and buying a new one. It will help you to avoid selling costs such as real estate agent fees and buying costs such as stamp duty.
Debt consolidation involves combining higher-interest debt that you may have (like credit cards and personal loans) into your lower-interest home loan. This can help to make all your debts easier to manage. It can also result in you paying less interest.
to buy a car
Home loan finance is usually cheaper than car loan finance. However, if you do use a home equity loan to buy a car, it’s important that you adjust your repayments so you pay it off within seven years. If you don’t, you could still be paying interest on your car for years afterwards.
Home equity loan FAQS
What is lenders’ mortgage insurance (LMI)?
LMI is insurance that protects lenders if borrowers don’t make their repayments. It is a cost paid for by borrowers. The cost of LMI can be more than $10,000 on an average-sized home loan in Australia ($500,000).
What is a loan to value ratio (LVR)?
Lenders calculate LVR as part of assessing your home loan application. It is the value of the loan expressed as a percentage of the value of your home. For example, an 80 LVR means that your loan amount is 80% of the current value of your home. Most lenders will require you to pay for LMI if your LVR is more than 80%. This protects them if you don’t make your repayments.
If you’re taking out a home equity loan, and your LVR rises above 80%, you will most likely have to pay for LMI. It will usually be added on to your loan balance.
How much can I borrow with a home equity loan?
This depends on your individual financial situation and how much you can afford to repay. It also depends on the lending policy of your lender. Different lenders will have different home equity loan terms and conditions that they are prepared to accept. For example, some may be prepared to lend to a higher LVR than others.
You can use our online loan repayment calculator to work out how much you may be able to afford to borrow.
What is usable equity?
Your usable equity is the difference between the lender’s maximum LVR and the amount you owe on your home loan. This is best explained using an example.
If the maximum LVR that your lender will accept for a home equity loan is 80% and your home is currently worth $800,000, the maximum you will be able to owe is $640,000 (i.e. 80% of $800,000). If you already owe $400,000 on your home loan, then your usable equity would be $640,000 less $400,000 (i.e. $240,000).