With home prices across Australia rising, home owners looking for extra funds, who have paid more than 20% off their home loan, can now borrow against their property. Known as a home equity loan, this form of borrowing can help you to merge debts, pay off a car, invest or renovate. Let’s look at home equity loans in greater detail so you can make your wealth work harder for you.
Basically, a home equity loan enables you to borrow the equity (value) that you’ve acquired in your home. Now, for those of you who are wondering, your home equity is the market value of your home less the amount you owe. For instance, let’s say you bought your home 15-years ago for $287,000 (Sydney’s 2003 median). Over that 15-years you’ve paid off $172,200, leaving you with a loan balance of $114,800. But, here’s the kicker: since 2003 Sydney’s home prices have jumped in value. So, that $287,000 home, now has a value of $905,917. Therefore, if you subtract the amount you owe from your property’s current value ($905,917 – $114,800), then you have $791,117 in equity.
Now: your lender won’t let you borrow the full amount of your equity as they need a part left to secure your mortgage. But, you can borrow up to 80% of that value or $632,893.60 based on the example. Although, you must remember that whatever you borrow will increase the value of your mortgage by this much. For example, borrowing $200,000 of your home equity will increase your mortgage to $314,800. So, you need to ask yourself if you can afford the extra repayments.
There are a few ways that you can estimate the value of your home. Here’s the deal:
Contact real estate agents for a free appraisal – With the market continually changing, one of the best ways to get a home valuation is to contact real estate agents for a property appraisal. For an accurate appraisal, an agent will need to call visit your home at a time that’s convenient and they’ll then look over your property. It’s also best to contact local agents for an appraisal as they know the area well and what prices homes are fetching, so they can give you an accurate indication of what your home is worth. It’s also important to invite more than one agent around for an appraisal as agent valuations will vary, so you want a median value.
Do your own independent research – Jump online and visit a real estate site such as Domain or RealEstate.com.au. Next, click on the ‘Sold’ tab. Then, type in your postcode or suburb name. Scroll through the list of sold properties until you find ones that have similar features to your home – land and home size, number of bedrooms and bathrooms, as well as car parking spaces etc. When you find properties that are similar print these out so that you can compare them later. Make sure you print out the prices that these properties sold for and when they sold. Look at listings that have sold within the last 6-months as this will give you more exact pricing information.
Use a home appraisal calculator or free report provider – There are many home appraisal services online that give you an indication of home value. To use these simply type in your postcode and then select the features of your home. Just bear in mind that these services are generic, so they have restricted ability. A great example of this type of tool is onthehouse.com.au. Both Domain and RealEstate.com.au also now offer property valuation tools, allowing you to search for your address and discover the estimated property value.
Gaining approval for a home equity loan is similar to other loans. However, some lenders will restrict the amount of equity that you can use. Why? Well, home equity loans can be up to 2.4 times riskier than a standard home loan because borrowers govern their funds. Therefore, they must be exceptionally good at money management. Otherwise, they can get themselves into a tight financial situation.
What’s the essential point? There are typically two types of home equity loans – a lump sum cash loan or a line of credit loan.
- Lump sum loan – This type of loan enables you to receive a lump sum for an investment or project. However, you will start paying interest immediately on this type of loan and for the full sum borrowed, even if you haven’t used it for its purpose.
- Line of credit loan – This type of loan is like a cheque account where you can draw out the funds as needed. But it gets better: you will only pay interest on the funds that you draw out. So, you can use the funds when you need to and only pay for the amount you’ve used, rather than the full amount approved.
Most major financial institutions offer home equity loans, such as the NAB, Commonwealth, ANZ and Westpac. Also, non-conforming and specialist lenders offer this form of loan. These types of lenders often have more lenient guidelines, but their interest rates can also be higher. So, it pays to shop around.
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If you are looking to renovate your property and upgrade your kitchen, or add an extension, then saving for the project may take years. At present, with home loans rates at the lowest they’ve ever been, borrowing against your home could save you more and allow you to get your project under way faster. Plus, if you’re smart with our money, you’ll find a project such as renovating can add further value to your home. Those using home equity to buy an investment can also increase their wealth further.