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Home equity loan guidelines

Home equity loan guidelines

If you’ve been paying off your mortgage for a little while you’ll start to build up a bit of equity, particularly if the housing market in your area is seeing property values increase. You may be wondering how you could access that equity, whether to pay off a debt, fund home renovations or take your family on a holiday.

Equity – the difference between the value of your property and the loan amount – may be accessed if needed for whatever financial reason. And may be done through a home equity loan.

However, home equity loans aren’t a one-size-fits-all financing option. Let’s explore some of the basic guidelines so you can deepen your understanding of home equity loans.

All about home equity loans

What to know about home equity loans

Home equity loans are where a borrower uses the equity in their property as security to borrow money.

There are three main ways homeowners can access the equity in their home via a home equity loan:

  • Line of credit – Like a credit card, you are given a pre-approved credit limit and may use these funds you need. CBA, ANZ, Westpac offer Line-of-credit-type home equity products. You pay interest on any funds you borrow.
  • Lump sum – Like a personal loan, you may be able to use your equity as security to borrow a sum of money to be repaid with interest.
  • Reverse mortgage – Available for retirees, typically for those who own their property outright. This option is usually used to help fund retirement costs. You may access part of the value of your property, either as ongoing income or a lump sum. This is repaid when the borrower chooses, including when selling the home, if moving into aged care of if they pass away.

Some homeowners may choose to access the equity in their mortgage by refinancing and increasing their loan value. This is different to a home equity loan but still one option homeowners may want to consider in their research.

When can you use a home equity loan?

You may be able to apply for a home equity loan when you have enough equity to use, generally when the property has increased in value and/or if you’ve paid equity into the loan over several years.

You may be wondering if you can use a home equity loan for anything, aka if the purpose of the loan matters to the bank. There are a range of reasons a borrower may want to take out a home equity loan, including to purchase a new property, for debt consolidation, for travel, for medical costs, or for home renovations to further increase the property’s equity.

A lender may not enquire into the purpose of the home equity loan compared to the strict eligibility associated with personal loans and car loans. But this may depend on the lender, so keep this in mind.

The amount of equity a homeowner can access may depend on their personal financial situation and is determined by the lender. The lender may assess your income, living expenses and liabilities to determine the pre-approved amount you may be eligible for.

The lender may also need to perform a valuation of your property to internally assess your equity levels. Property valuation may take several days, so if you’re in urgent need of funds you’ll want to keep this in mind.

How can you increase your equity?

There are a few ways that homeowners may be able to increase their equity before applying for a home equity loan. This may help to boost the amount of funds they are approved to access, whether through a line of credit or as a lump sum.

Increasing your property equity may be done through:

  • Renovating and upgrading the interior and/or exterior of the property.
  • Reducing the loan balance by making extra repayments.
  • Using an offset account to reduce the amount of interest charged on the loan and in turn decreasing the overall loan balance.

What are the risks of a home equity loan?

There are some potential risks that homeowners may need to consider before applying for a home equity loan. While access to funds when needed, whether for renovation or a family holiday, can seem ideal, it’s important to weigh up the disadvantages too.

Firstly, by reducing your equity your home loan repayments may increase too. This is generally because you’ve withdrawn from the amount of money you’ve paid into the loan, increasing the balance owing.

Also, in terms of home equity loan terms, there is typically no set repayment term. So, unlike a personal loan that you know may be paid off in 3 years, for example, the home equity loan may be added to your loan balance and therefore repaid over your loan term. This may turn what could have been a 3-year fixed personal loan into thousands of dollars in additional interest charged on a higher mortgage balance over many more years.

Finally, if for whatever reason you find that you can no longer service these new home equity loan repayments, you may be at risk of losing the property. As with any financial product, taking on debt you cannot repay may result in defaulting on the loan. Not only may the property be seized by the bank, but this will hurt your credit history and credit score.

What are some alternatives to home equity loans?

Unsure if a home equity loan is right for you or just want to consider all your options? You may want to consider the following:

  • Personal loan – While a personal loan’s interest rates may be higher on average than current home loan rates, they offer much shorter loan terms. This means that you may end up paying less interest over time on top of the funds you’re looking to access.
  • Credit card – Depending on the amount of cash you’re after, it may be worth considering a low-rate or interest-free credit card as an alternative. You will only have access to what has been approved as your credit limit, but if you can pay your balance in full by the next statement period you may avoid interest charges altogether. Keep in mind that it is very easy to accrue interest on a credit card if mismanaged as the average card rate has sat around 16 per cent for many years.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

Is a home equity loan secured or unsecured?

Home equity is the difference between its current market price and the outstanding balance on the mortgage loan. The amount you can borrow against the equity in your property is known as a home equity loan.

A home equity loan is secured against your property. It means the lender can recoup your property if you default on the repayments. A secured home equity loan is available at a competitive rate of interest and may be repaid over the long-term. Although a home equity loan is secured, lenders will assess your income, expenses, and other liabilities before approving your application. You’ll also want  a good credit score to qualify for a home equity loan. 

How fast can you get a home equity loan?

Completing an application for a home equity loan may only take 20 to 30 minutes. It may take a lender anywhere from a day to a few weeks to process and approve your application. This may be affected by your financial situation, your level of equity, and whether or not your lender needs to organise an in-persona valuation of the property.

 Before you can apply for a home equity loan, you’ll need to build up some equity in your property. The more money you can put towards extra repayments to reduce your home loan principal, the faster you can increase your equity. Also, if property values in your area increase, this may help deliver an instant equity increase once your property has been valued.

Can I borrow extra on my mortgage for furniture?

Yes, you may be able to borrow extra on your mortgage for furniture. This may be done by considering a home equity loan. A home equity loan may allow you to access the equity in your mortgage for furniture via:

  • A line of credit – A pre-approved credit limit based on your equity.
  • A lump sum payment – Like a persona loan, with equity in your home loan used as security.

If you want to avoid borrowing more money, consider accessing cash deposited into your offset account or drawing down on extra repayments with a redraw facility to fund furniture purchases.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

Can you remove a cosigner from a home loan?

Taking out a home loan is an act of financial responsibility and a cosigner on a home loan shares that responsibility. For this reason, removing a cosigner from a home loan may not be straightforward. Usually, you can add a cosigner, or become a cosigner, when applying for the home loan. In such a circumstance, the lender may ask you to stipulate the conditions for a cosigner release, which are the terms for removing a cosigner from the home loan. For instance, you may agree that you can remove a cosigner once half the loan amount has been repaid.

However, not stipulating such conditions doesn’t mean it’s impossible to remove a cosigner. If the primary home loan applicant has a sufficiently high credit score and has not delayed any repayments, the lender may be willing to remove the cosigner. You should confirm that doing so doesn’t affect the terms of the loan. If the lender doesn’t agree to remove the cosigner, the primary home loan applicant may have to refinance the loan in order to do so. If there were specific reasons for needing a cosigner and those reasons are still valid, then you may have some challenges with refinancing.

Can you borrow the deposit for a home loan?

Most lenders will want the majority of your home loan deposit to be made up of ‘genuine savings’ which is income earned from your job. While a small number of lenders may let you use a personal loan or a credit card to help cover the cost of your deposit, this may potentially cost you more in interest, and put your finances at higher risk.

If you haven’t saved a full deposit, it may be possible to effectively borrow the deposit for a mortgage with the help of a guarantor. This is usually a parent of other family member who guarantees your mortgage with the equity in their own property.

It may also be possible to borrow the money for a home loan deposit from a family member (e.g. the Bank of Mum & Dad) or a friend, provided you draw up a formal legal agreement to pay this money back, showing your mortgage lender that you’re taking responsibility.

How long does ANZ take to approve a home loan?

The process of applying for a home loan usually stays the same across all lenders. On the other hand, the time it takes for a lender to approve the home loan differs from lender to lender. When it comes to ANZ, it takes anywhere between 15 to 18 business days to approve a home loan from the day of the application to approval. This timeframe is highly dependent on the credibility and availability of your documentation. You can apply for an ANZ home loan in two ways; a Quick Start home loan application or a full online application.

If you opt for the Quick Start home loan option, you’ll need to fill out a form with basic details. During this stage, you don’t need to add any supporting information. An ANZ representative will then call you within 48 hours. The representative will help take your application forward, including assessing all relevant information, documentation and conducting a credit check.

You can also submit your entire home loan application with ANZ online by filling out a comprehensive form with all the information and documentation needed.

Once ANZ has conducted the preliminary checks, you’ll be informed of the pre-approved amount they’re willing to offer. Based on this amount, you can set a budget for your property search and make sure you stay inside your budget. Pre-approval will last for three months but can be extended by applying with ANZ if you don’t find a property. But it’s best to find a property as soon as possible as ANZ may decide to change the amount if your financial situation changes.

After you find a property and have your offer accepted, ANZ may send an assessor to the property to verify it’s value. If everything is per their terms and conditions, ANZ will finalise your home loan’s approval and release the funds.

Can first home buyers apply for an ING home loan?

First home buyers can apply for an ING home loan, but first, they need to select the most suitable home loan product and calculate the initial deposit on their home loan. 

First-time buyers can also use ING’s online tool to estimate the amount they can borrow. ING offers home loan applicants a free property report to look up property value estimates. 

First home loan applicants struggling to understand the terms used may consider looking up ING’s first home buyer guide. Once the home buyer is ready to apply for the loan, they can complete an online application or call ING at 1800 100 258 during regular business hours.

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase.