A home equity loan can help put the value of your property to work for you. Whether used to access a flexible line of credit, or to secure a mortgage over an investment property, your home equity can prove a useful tool for reaching your personal and financial goals.
But is it possible to take out two or more home equity loans to provide further financial flexibility? And would doing so be a good idea?
How do home equity loans work?
A home equity loan is where you borrow money using the value of a property you own as security.
Your equity is the current value of your property, minus the remaining loan principal still owing on the mortgage. For example, if you have a $400,000 mortgage over a property valued at $600,000, you have $200,000 equity available.
However, not all of this equity may be considered usable equity. Most lenders will let you access a maximum of 80 per cent of your property’s value as equity, minus the mortgage principal. So for the previous example, you would have $80,000 in usable equity.
You may be able to use this equity to secure a line of credit, which works a lot like a credit card with a maximum limit based on your usable equity. You could also use this equity in place of a deposit to secure a mortgage on an investment property.
How many home equity loans can I have?
In theory, if you had enough usable equity available, you may be able to take out more than one home equity loan at once, each one secured by a portion of your usable equity. For example, you may be able to use part of your available equity to secure a line of credit for managing the costs of an ongoing project, and separately access another part of your equity to borrow a lump sum to invest in shares.
Keep in mind that once equity is used to secure a loan, it’s no longer considered usable equity. This means you can’t use the same equity to secure two or more different loans. Your outstanding loans and credit products are recorded in your credit file, which lenders will access as part of the credit check that takes place when you apply for a loan, to confirm that they’re not lending more money than you can safely repay.
Another option practiced by some investors is to use the equity in their first property to secure the mortgage on their second, then the equity in their second property to secure a mortgage on a third, and so on. This is usually considered a relatively risky investment strategy, as it counts on property values to increase (when they might stagnate or decrease), and defaulting on one loan could mean losing the whole chain of investment properties.
Before you apply for your second home equity loan, or even your first, you may want to first meet with a financial adviser or a mortgage broker. These experts may be able to help you work out if a home equity loan offer the best solution to help you reach your personal and financial goals.