Home Equity Loan

Compare the Best Home Equity Loans and Line of Credit Loans

The term as safe as houses comes from the fact that given enough time, most homes will increase in value. This increased value can come in a spurt as a housing boom or build over time as long term capital growth, so the chances are good that if you have been repaying your home for some time even just a few years you have accumulated some equity in your property.

The equity in your home is the difference between what the property is worth, and what you owe on your mortgage. If you were to sell your home this equity would be your profit, but if youre not ready to move, and want to access this equity anyway, you can do so with a home equity loan.

Featured Home Equity Home Loan

Apply for Loans.com.au – Dream Catcher home loan and get a low variable rate, plus no application fee and lender’s legal fee.

• Interest Rate of 5.85%
• Comparison Rate of 6.21%
• Application Fee of $0
• Maximum LVR With LMI: 80%
• Minimum Borrowing: $50,000
• Maximum Borrowing: $750,000

Enquire about the Loans.com.au – Dream Catcher​ terms and conditions

Featured Home Equity Loans

Home Loan	Details	Interest Rate (p.a.)	Comp Rate^ (p.a.)	App Fee / Ongoing Fee	Max LVR	Min & Max Borrowing
Loans.com.au – Dream Catcher​	A home loan with no application and a low interest rate. Offer valid for limited time.	5.85%	6.21%	$0 / $375	80%	$50,000 / $750,000
UBank UHomeLoan (Variable Rate)	One of the low variable interest rates with a low application fee	5.83%	5.83%	$0 / $0	80%	$100,000 / $1,000,000
Illawarra Home Loans Bank Beater Home Loan	A low variable rate, Get discount of 0.05% p.a. after 5 years. Also no application fee.	6.07%	6.35%	$0 / $345	90%	$250,000 / $1,000,000
bankmecu Overdraft/Equity Home Loan	A home loan with flexibility to pay your loan off sooner rather than later.	6.74%		$595 / $12.50	80%	$20,000 / $9,999,999
State Custodians Mortgage Company Line Of Credit Loan	Awarded the Best Non-Bank Line of Credit Loan for 2011.	6.02%	6.23%	$0 / $345	90%	$150,000 / $1,000,000
State Custodians Mortgage Company Standard Variable Offset Loan	A home loan awarded 2011 Non bank Lender of the Year	6.02%	6.23%	$0 / $345	95%	$150,000 / $1,000,000
ME Bank Members Package – Eligible members with a Member Package	Features redraw facility, additional repayments with a low interest rate.	6.19%	6.19%	$0 / $395	80%	$50,000 / $2,500,000

That is why you need to understand exactly how a home equity loan works, how best to use it to your advantage, and how to avoid the common pitfalls and dangers of refinancing your home loan in this way.

What is a home equity loan?

A home equity loan uses your property as security, allowing you to access the portion of value which you have already paid off, and which has been established through capital growth. To calculate the equity in your home, subtract the remainder of your home loan from the value of your home, for example if your home is valued at $400,000 and you have a home loan of $270,000 you have $130,000 worth of equity in your home.

Often a lender will only allow you to access a percentage of that equity to help you protect your property; when you access the equity in your home, you are reducing your ownership of the property and if you miss a payment and default on your loan you can lose your family home.

What are the advantages of a home equity loan?

Apart from giving you access to equity which was previously locked away, you can also benefit from a home equity loan by:

• The lower interest rate. Your home equity loan is secured by your home and therefore the loan is less of a risk for the lender as they have a good chance of recouping their losses if you default. As a result, they are willing to offer you a lower interest rate, much lower than a personal loan or margin loan, and of course credit card interest.
• Tax deductible interest. Home equity lending is also unique among other forms of personal finance in that the interest you pay on the first $100,000 you borrow is tax deductible so you can get more from your home, and more back at the end of the financial year. Plus, if youre using your home equity for improvements or to buy another home, the interest from the first $1 million you borrow is tax deductible.

What are the disadvantages of a home equity loan?

The major drawback to be aware of when considering a home equity loan is the fact that you can be putting your home at risk. When you borrow from the equity in your home you are reducing the amount of the property you actually own, so you are in effect undoing all of your hard work in making repayments to this point, and using that money elsewhere.

Also, since the principal of your home loan has increased, you are paying more interest on your home loan again, as well as being charged a number of other refinancing and application fees to process a home equity loan.

What can a home equity loan be used for?

The risks associated with these home loans re primarily borne from not being able to meet your repayments, and if you have budgeted and researched which we will show you how to do later in this guide then you can use the equity in your home to help your out in other areas of your life.

For example, you can use the equity in your home for debt consolidation purposes to help you clear high interest personal debts such as credit cards and personal loans. Home loans are one of the cheapest forms of finance available so you can make significant savings in interest if you consolidate your credit cards and personal loans into your home loan plus some of the interest from your home equity loan is tax deductible, where your personal debt interest is not.

In consolidating your debts into your home loan you can also make just one monthly payment to cover all of your commitments. However, it is important to keep your consolidated debts as a separate account within your home loan to stay ahead of interest charges, otherwise you can be paying off your credit cards for the next 30 years of your home loan.

Instead, if you have credit card debt of $20,000 which is charging you 18% interest you may be paying more than the minimum amount to clear the debts, but even at $450 a month, you will still be paying your cards off over six years, and paying more than $13,000 in interest. However, consolidating your debts into a home equity loan with an interest rate of 8% you can keep making the same payment, but clear your debts in just four years and pay just over $3,000 in interest.

You can also put your home equity back into your home through home renovations or improvements as this can increase the value of your home, and help you rebuild more equity. If you are making improvements to your home specifically to increase its market value, it can be worth consulting a professional property valuer for advice on property values and appeal in your area. Some improvements can recoup your renovation costs in increased value such as a new kitchen however, other improvements such as a pool can be over capitalising and be too specific to increase value across the property market.

Education is another investment which can be just as important as property for the future and if you access your home equity for your own education, that study can lead to greater qualifications and a higher paying job in the future. You can also structure your home equity loan to pay for your childrens education as private schools and three or four years at university arent cheap, but as your children secure their own bright future, they can repay the loan for you.

Using your home equity to buy luxury items can be a poor investment as things like cars, boats and new TVs will only depreciate over time, however you are increasing your debt levels in order to purchase them.

Making an investment or starting a business using the equity in your home can help you build appreciating assets. Using the equity in your home wisely to invest in property can be a sound long term strategy as your investment property increases in value, and also begins to accumulate equity of its own. While most lenders will make their own assessments of whether your investment or business intentions are too risky, dont forget that a separate margin loan for investment purposes will charge a similar interest rate, and not put your property at risk.

Paying bills with your home equity can see you solving a long term financial problem of spending more than you earn, with a short term solution because your home equity can run out. If you are living beyond your means, cut back and pay down debts before you purchase luxuries such as takeaway dinners and new clothes and shoes. However, if you need an injection of funds for an emergency, an operation or help a family member, you may consider using some of the equity in your home if your savings wont cover the cost.

Are there different types of home equity loans?

There are three main ways you can access the equity in your home, using a standard home equity loan, a line of credit loan or applying for cash out refinancing. A standard home equity loan is structured like a traditional mortgage in that you receive a lump sum payment of your equity, which you repay on a fixed or variable interest rate in monthly instalments.

A line of credit loan allows you to access the equity in your property when you choose, as the entire value of the equity is approved on your loan account, and you can draw down on the funds as you need them. This makes a home equity line of credit loan ideally suited to a renovation or investment as you can use the funds you need when you need them, but not pay interest on the whole amount of credit until it is all drawn upon. A line of credit is a revolving loan which means you can access the funds, pay them off and then access your credit again.

Cash out refinancing can be one of the most expensive ways to access the equity in your home as you are not borrowing against your home, but refinancing to a higher loan amount. Your new mortgage is more than your current mortgage, and you use that to repay your old mortgage, and the difference is the equity you can now use. Using cash out refinancing can secure you a lower interest rate than a home equity loan, but you need to make sure the exit fees to pay out your old loan and the application fees to open a new mortgage are outweighed by the benefits and savings.

How much of my equity can I access?

The more equity you access, the greater the risk to your home as your repayments rise, your interest charges rise and if property prices fall you can find you owe more on your home than it is worth. This is why most lenders will only allow you to have a loan to value ratio of 80% on a home equity loan.

You can work out your LVR by dividing the amount you have borrowed by the value of your home. For example, if your home is worth $100,000 and your mortgage is for $60,000 your LVR is 60% and if you then access $20,000 of your equity, your LVR becomes 80%.

The Dos and Donts of Choosing and Using a Home Equity Loan

While a lender may say they have your interests and home security at heart, when it comes down to it, they want you to borrow more money from them and pay them more interest. That is why you need to enter into comparing home equity loans with all of the information on hand already, so you can spot the traps, and make sure you are getting the best loan features you need.

Do: Know whats in the fine print

At the end of the day it is up to you to read and understand your loan contract so dont assume the lender is explaining all of the costs and conditions. Terms to look for in your home equity loan contract include:

• Pre-payment penalty. You will pay this one off fee to your lender if you pay off your loan early, before the end of the term. This could be because you enjoyed a lump sum cash injection and can afford to repay your loan, or because you are paying out the mortgage to refinance to a different loan or lender. These exit fees can be a percentage of the loan amount, often around 1% or can be a calculation of interest charges based on how long you have been repaying the loan, and how much interest your lender is now going to miss out on. The early repayment penalties can be even greater on a fixed interest rate loan and can run to the tens of thousands of dollars.
• Credit insurance. Credit insurance is optional on a home equity loan, but your lender may include it to cover life insurance, critical illness insurance; credit life insurance for example will repay your home equity loan if you die. While your lender can provide credit insurance, this can be one of the most expensive ways to protect your loan, and instead, approach your current insurance provider or shop around to find the most affordable option, or a simple life insurance policy which will pay out your debts. If you do have your lender supply your credit insurance, make sure the full loan amount is covered, and try and pay for it outside of your loan contract because financing payment for your insurance adds more interest charges.
• Increased interest on late payments. Find out what happens if you miss a payment on your home equity loan as some lenders will increase your interest rate for the remainder of the loan term if a repayment is late. You may be able to negotiate with your lender to remove this term from the contract, or shop around to find a lender who doesnt penalise you in this way.

Do: Maintain your integrity and seek a lender who does the same

When you are apply for a home equity loan, it is easy to trust your lenders information and advice, as they are the experts in this area right not you? Wrong that is why youre here, learning about all of the ins and outs of home equity loans so you know what to expect, you know what youre entitled to, and you know how to protect yourself, your home and your family.

Therefore, to make sure youre not bullied or cajoled into a loan which is not right for you, make sure your lender doesnt:

• Ask you to provide false or misleading information on your application. For example your lender might tell you to say your loan is for business purposes when it isnt to qualify for a lower interest rate.
• Pressure you into apply for a higher loan amount than you want. Lenders have their own eligibility criteria and stress rates to calculate what you can afford to repay based on your income and other expenses. However, dont just take the lenders word for it run through your budget at home yourself to make sure you can meet the monthly repayments comfortably now, and for the entire loan term.
• Misleads you about the terms of the loan. Dont accept the word of a lender who tells you dont need to read a loan disclosure, and make sure that the terms which are discussed in initial meetings are the same ones you are signing in your application. And dont ever sign a blank form with a promise from the lender that theyll fill it in for you later always know what youre signing.
• Give you copies of your paperwork. Always be wary of a lender who refuses to give you a copy of the documents you have signed, make no mistake, you do need them for your files.

Dont: Rely on just the interest rate to tell the loan story

The interest rate is the most high profile loan feature, but is not the only factor which determines how much the loan will cost you. you will still need to make a comparison of the interest rates, but make sure you do so on a level playing field, for example many lenders will offer a low introductory interest rate to entice you in, so make sure you know the revert rate as well.

When comparing home equity loans:

• Look at the loan term. A longer loan term can make your repayments appear more affordable, but in the long run you are actually paying more for you loan in interest charges.
• Be aware of balloon payments. The balloon is the amount which is left at the end of the loan which must be repaid before the loan can be settled. You can repay the balloon with your own savings or if you are selling your property at that time, but a balloon payment can also make your repayments appear more affordable, when you actually have a lump sum to pay.
• Compare exit fees. Very few people will hold their home loan for the full 30 year term so if you see yourself moving house before the end of your loan term, be sure to compare early exit fees and charges.

Dont: Choose a balloon payment

A balloon is the amount which is left at the end of the loan term and you may be tempted to include a balloon payment with your home equity loan as you can often qualify for a lower interest rate. The lender will offer you this lower rate because you are also going to be charged interest on your lump sum balloon payment, plus the lender is able to secure you as a borrower thanks to lower interest rates and lower repayments, which you otherwise wouldnt be able to afford.

A balloon payment can come in several forms with both a home equity loan and line of credit. For example, if you have used your line of credit for investment purposes, you may have only been making interest only repayments. However, at the end of the term you still have the full principal amount to repay. To repay this amount you will either need to find this lump sum amount by selling your investments, or you will need to refinance to a new loan.

While in the case of an investment property you may be ready to liquidate that asset and move on, in most home equity cases you have accessed your equity because you need the cash, and you are unlikely to have a sudden injection of cash at the end of your loan term. If you were to refinance to a new loan you will be paying new loan application fees and you can be subject to the new market interest rate, rather than the old rate you had secured on your previous loan at the beginning of the term.

Instead, a balloon payment should be a flag for you that you cannot afford a home equity loan, because if you cant afford to make the repayments without a balloon, how are you going to be able to repay the balloon at the end of the loan term?

As your loan amount nears the market value of your home, your mortgage becomes riskier for you and your lender. This is risky for you because if you sell your home you can be making little to no profit from the sale after you repay your loan. This is also why lenders avoid high LVR loans, but also because they know that the greater your repayments, the greater the chance of you experiencing mortgage stress.

Few lenders will allow you to have an LVR greater than 100% in the wake of the GFC however, in some instances you can still secure a 110% loan for example. However, in this instance the loan is no longer a home equity loan, because it is not secured by the equity of the loan it is now unsecured, above the value of your property. Your lender will see this as a risky loan and will pass this risk onto you in the form of a higher interest rate.

Also, when your loan to value ratio is higher than 80% on a standard home equity loan, you will be required to pay lenders mortgage insurance. The LMI protects the lender if you default on the loan and they cant recover their costs, and is another way you are disadvantaged by a high risk loan.

How to Choose a Home Equity Loan

Now you know the benefits, the drawbacks and how to avoid the common pitfalls of a home equity loan, you are ready to start comparing your loan options, but this is no time to let your guard down. Instead, make sure you spend as much time in your comparisons as you have in your research of home equity loans, because while there are common features across the loan type, it is still important to make individual loan comparisons.

This is because each lender has the ability to offer a different interest rate and different loan features, so before you decide on a home equity loan, take the time to do some negotiating. There is fierce competition in the home loan market and often all you have to do is ask and you will find your lender is able to negotiate on the interest rate, some of the application fees or costs for additional features. Just make sure you follow the previous points in reading and understanding the fine print to make sure that a discount on one aspect of the loan isnt leading to an increased fee in another.

In making your comparisons dont forget to give your current lender a chance to beat the home equity loan deals you have found elsewhere as applying for a home equity loan or refinancing for cash out from your existing lender can save time, paperwork, and a lot of application and exit fees.

Which type of home equity loan is right for you?

Depending on your financial situation, your current home loan set up and your reason for accessing the equity in your home, your home equity needs could be best suited to a traditional home equity loan, a line of credit home loan or cash out refinance to access the funds.

A home equity loan:

• Requires less self control. If you have a line of credit approved above the value of your home loan to allow you to draw down on your equity, you will need to be very disciplined in using these funds for only their designated purpose, and not getting carried away with spoiling yourself, or trying to catch up on some bills.
• Has fewer fees. A home equity loan tends to be cheaper to use than a line of credit loan and is much cheaper than refinancing to get cash out of your loan. As a line of credit acts like a transaction account you need to be very aware of your account usage, transaction fees and annual fees.
• Is best suited to debt consolidation. If you already have some out of control personal debts, then you are unlikely to have the self control needed to responsibly use a line of credit loan. Therefore, if you are accessing equity to consolidate debts, a home equity loan is the easiest to manage and most responsible option.

• A variable interest rate to move with the times. A line of credit loan typically charges a variable interest rate which means you can benefit from times when interest rates drop and enjoy the flexibility of a variable rate loan. This often means a lower interest rate in general, as variable rates tend to be at least half to one percent below fixed interest rates.
• Allow you to just pay the interest. This makes them perfect for investment purposes where the interest and other costs associated with your investment including account fees and charges are tax deductible. Interest only repayments can also be more affordable at times when cash flow is tight, for example if you run your own business and are waiting for invoices to be paid.
• Suits significant renovations. A line of credit is like having a loan amount approved and waiting for you to use it. As a result you can draw down on the amount whenever you need, to make progress payments to contractors throughout the course of a renovation project. In this instance you have a clear objective for your money and a (somewhat) concrete end date which means you can stay in control of your repayments.

• A lower interest rate, but the risk of higher exit fees. To benefit from a cash out refinance really depends on the exit fees your existing lender is going to charge you. These depend on the type of loan you currently have, how long you have held the account and whether you are on a fixed or variable interest rate. To help you decide whether a cash out refinance is a viable way for you to access the equity in your home, deduct the exit fees from the savings you will make with a lower interest rate, and if your calculations break even within 12 to 18 months, refinancing can be worthwhile.
• Loan processing and approval times. If you need to access your equity quickly for the deposit on your next home for example, refinancing to get cash out can take longer as you have to complete the entire application and approvals process which can take several weeks.

What will a home equity loan really cost?

Looking beyond the interest rate and into the usability and reality of your home equity loan options can help you decide whether you will benefit from accessing the equity in your home, or whether you would be better saving up the money you need.

Most financial advisors will tell you that there is little point in saving while you are repaying a home loan because the interest you earn in a savings account will always be less than the interest you are paying on your loan; therefore, all extra funds should be channelled into your loan. However, your life doesnt stop when you have a home loan, you still want to travel, upgrade your home or expand your investments, so should you save up for these, or just access the easy money youve already got sitting in your home as equity?

To answer this question, consider the true costs of a home equity loan, and if your situation would see the benefits of a home equity loan increasing the value of your home for example outweigh the drawbacks of saving the cost of renovation materials will always go up, and the interest earned on your savings account is subject to income tax.

How equity loan costs to consider include:

• Compare the comparison rates. While the interest rate of your loan will tell you how much you are repaying on top of your principal amount, the comparison rate is all of the fees and charges of your loan over the course of a year, expressed as a percentage. All Australian lenders are required to provide a comparison rate for all of their home loans, and this can be a quick and easy way to compare the true cost of the loans you are looking at.
• Once off fees. These include application fees, valuation fees, stamp duty and legal fees which are often payable with a new loan. These are not included in the home loans comparison rate as they do not contribute to the ongoing cost of the loan but can equate to between 2% and 5% of the total loan amount, before the loan is even approved.
• Ongoing fees. Annual or monthly fees can differ significantly between the lenders and shopping around can save you hundreds of dollars a year, and thousands of dollars off of your loan as the annual fee can be added to your loan principal each year, and must be repaid from your monthly repayments, meaning you are actually repaying more than your original loan amount.
• Loan feature fees. The costs for features such as redraw or additional repayments are not usually included in the comparison rate, so the real cost of your loan can depend on how you intend to use the account. If you want to make additional repayments to your loan when you have spare cash to help rebuild equity, make sure that this feature is included for free.
• Interest rate. Finally the interest rate can be compared and negotiated, but often depends on your credit rating, and your loan to value ratio the more secure your loan and the lower your LVR, the lower your interest rate can be.

Your home equity can be something which you feel entitled to you have made a smart investment in your home, you have been working hard to meet your repayments each month, and even dropping in a little extra when you can. Yes, home equity is a form of savings and by accessing these funds you can make some wise investments or some prudent renovations to increase the value of your home further.

At the same time, home equity is like no other form of savings you have ever had, because as soon as you access it, you must start repaying it, and this is not like borrowing from your piggy bank and swearing to put the money back next payday if you fail to repay your home equity now that your home loan principal is greater, you are risking more than an empty piggy bank, you are risking the family home. That is why you need to feel secure in the knowledge that you are making an informed decision about accessing your home equity, and the home loan product with which you are going to access those funds, so that you can also feel secure in your home, and in making the purchase you refinanced for.

Related Resources

• Line of Credit Equity Loans

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