What Is a Home Equity Loan and How Does It Work in Australia?
Borrowing against your home adds to the repayments your income needs to cover. A home equity loan in Australia also raises a question about your existing mortgage: keep it or replace it? For an application through our brokers at Mortgage Providers, your current loan terms and the amount you need provide the starting figures for comparing the cost of additional borrowing.
If you want to access home equity, you can borrow against your property without selling it. The loan gives you funds for another purpose, with repayments under the agreed terms. How you receive and repay that money depends on the type of loan you arrange.
What Is Home Equity?
Home equity is the difference between your property's current market value and the amount you still owe on your home loan. Here is a simple formula:
Home Equity = Current Market Value of Your Home − Outstanding Mortgage Balance
For example, if your home is valued at $700,000 and you still owe $400,000 on your mortgage, your home equity is $300,000. A lender may allow you to borrow a portion of this equity, depending on your property value at the time of the loan application.
How Much Usable Home Equity Could You Borrow?
How much you can borrow against home equity depends partly on the value your lender accepts for your home. This may differ from an agent’s appraisal or an online estimate. Your usable home equity depends on the percentage of that value the lender will lend against, less what you already owe.
For the $700,000 home in our example, a lender using an 80% limit would allow total borrowing of $560,000. With $400,000 still owing, that leaves $160,000 you could apply to borrow. Your income and other commitments will also affect how much the lender approves. Fees may reduce the funds you receive.
Some lenders allow borrowing above 80%, although lender’s mortgage insurance may apply. This insurance protects the lender if you cannot repay the loan.
If you work for yourself and do not have payslips, we can check which lenders accept business bank statements or other income documents. Our brokers at Mortgage Providers use those requirements to find a lender suited to how you earn your income.
Comparing Types of Home Equity Loans
As you pay down your home loan, you build equity, and your property value could also increase. However, lenders limit the proportion of your property's value you can borrow against, so your total equity is not necessarily available to borrow.
In Australia, loan terms vary by lender and product. You may receive funds as a lump sum or through a line of credit, which may have no fixed repayment term.
Lump Sum Loan: This provides you with a single amount of money. You then make regular repayments over an agreed term, similar to a traditional home loan or personal loan. This option suits a specific amount for a one-off expense, like a major renovation.
Line of Credit: A line of credit home loan works like a large overdraft secured against your home. A lender approves a maximum borrowing limit, and you can withdraw funds as you need them, up to that limit. You pay interest on the amount you use. This gives you access to funds for ongoing expenses, subject to the facility's terms.
Comparing a Top-Up With Refinancing
If you refinance to access equity, a new loan replaces your existing mortgage and includes the extra borrowing. A top-up adds funds through your current lender, subject to approval.
With refinancing, the interest rate applies to the existing balance as well as the extra funds. Keeping your current mortgage and arranging a top-up may cost less if refinancing would mean losing a favourable rate. Application and discharge fees also affect the cost; leaving a fixed-rate loan may incur a break cost. Moneysmart recommends checking the replacement loan's term, since extending repayment over more years increases the time you pay interest.
How You Can Use Your Home Equity Loan
Using your equity means taking out a home equity loan or borrowing against your home to fund another purpose. You could use it for the following:
- Home renovation.
- Debt consolidation.
- Investment.
- Major expenses.
Giving Consolidated Debt a Shorter Repayment Term
Consolidating a credit card balance into your mortgage puts that debt on the home loan's repayment schedule. Even at a lower interest rate, repaying it over decades may cost more overall.
A separate loan split lets you set a shorter term for the consolidated debt and track its balance separately. Your repayments then reflect the time you intend to take to clear that amount. If the old credit card remains open, further spending adds fresh debt alongside the amount transferred to your mortgage. Closing the card or reducing its limit reduces the credit available for further purchases.
Keeping Investment Borrowing Separate From Private Spending
When you borrow for an investment property deposit, the potential interest deduction depends on how you use the money, even if your own home secures the loan. Private purchases paid from the same loan require you to divide the interest between private and investment borrowing.
A separate split used only for the investment makes that spending easier to trace through your transaction records. Your tax adviser can establish which interest is deductible. If you later redraw money for a private purchase, the interest on that amount needs separate consideration; the original investment purpose does not automatically apply to money borrowed again.
What Are the Risks of a Home Equity Loan?
Your home is used as security for a home equity loan. If you fail to make your repayments, you are at risk of losing your home.
Speak with an experienced mortgage broker about the amount you can afford to borrow and your repayment plan. Interest rates can fluctuate, so your budget needs room for potential increases.
If you are considering a home equity loan in Australia, our brokers at Mortgage Providers can assess your options, including specialist lenders for applicants with bad credit. Approval depends on the lender's assessment of your circumstances.
Compare home equity loans in Australia with Mortgage Providers for your planned renovations.
FAQs
How does an equity loan work if I am self-employed?
If you are self-employed, an equity loan application still requires evidence of your income. Depending on the lender, business bank statements, BAS or an accountant's declaration may be accepted instead of standard payslips.
Can I get a home equity loan with bad credit?
A home equity loan with bad credit may be available through a specialist lender. The credit issue and your current ability to repay affect the lender's decision and the loan terms offered.
Is a home equity loan the same as a reverse mortgage?
A reverse mortgage generally lets you defer repayments while living in your home, with interest added to the balance. Repayment is usually due when you sell or permanently leave the home, or from your estate. Standard equity loans generally require ongoing repayments.