To get a home equity loan, you’ll first need to get some equity in your property. While it will likely take some time to build up your equity, you may find that you have more equity available than you realise, which could help things go faster.
What is equity?
Equity is the percentage of a property that doesn’t have a mortgage owing on it. In other words, it’s how much of the property that you own outright.
You can quickly estimate the equity in your property using this formula:
Current property value – Outstanding mortgage principal = Equity
If you’re not sure of your property’s current value, you can order a free property report online to get an estimate.
Keep in mind that you likely won’t be able to put all of your equity towards a loan. In most cases, lenders calculate your usable equity based on 80 per cent of the property value minus your mortgage principal. This keeps 20 per cent of the property value aside so you won’t need to pay for Lender’s Mortgage Insurance (LMI) to cover your lender (not you) in case you default on your repayments.
How can you quickly grow your equity?
You will slowly but surely build up the equity in your property simply by making principal and interest repayments on your home loan.
If you’re able to make extra repayments onto your home loan, this can shrink your mortgage principal further, increasing your equity. The more money you’re able to use as extra repayments on your home loan, the faster you can grow your equity.
Additionally, if property prices have been rising in your area, the value of your home or investment property may have also increased, thus increasing your equity. Of course, if property values fall in your area, this could also affect your equity.
How long does it take to apply for a home equity loan?
Once you’ve built up equity in a property, applying for a home equity loan can be a relatively quick process.
After estimating how much usable equity is available in your property (80% of the current property value minus your outstanding mortgage), you can contact a lender and complete an application form, which may take 20-30 minutes. Much like applying for a mortgage or a personal loan, it may take anywhere from a few days to a few weeks for your home equity loan application to be approved and for you to gain access to the money.
If your lender needs to perform a valuation on your property to confirm your level of equity, this could affect the turnaround time for your home equity loan application. If yours is a well-established property in an area with plenty of sale data available, the lender may be able to quickly perform a desktop valuation. If yours is a new property, or located in an area without many recent sales of comparable properties, the lender may need to send out a valuer to inspect the property in person, which could take up to a week to organise.
A mortgage broker may be able to help speed up your home equity loan application, such as by checking your application for any errors or issues that could slow down the approval process. A broker can also help you work out if a home equity loan is the best choice in your financial situation to help you reach your personal goals.