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Is it possible to get a personal loan using your home equity?

Vidhu Bajaj avatar
Vidhu Bajaj
- 5 min read
Is it possible to get a personal loan using your home equity?

If you need a few thousand dollars to make home improvements, pay some pending bills, or even pay for a vacation, applying for a personal loan is a relatively straightforward option. The best part about applying for a personal loan is that you can use the money for almost anything, from planning your wedding to fixing the tiles in your kitchen.  

You'll also find the interest rates on personal loans to be lower than for some other lending methods, such as credit cards. However, the rate that you get on a personal loan also depends on your credit score and whether your loan is secured or not. You’re likely to find it challenging to get approved for a personal loan with a poor credit rating.  

If you’re an existing homeowner, you may have another option to fulfil your personal loan requirement. As a homeowner, you grow equity in your property with every principal and interest mortgage payment you make. If your property grows in value, it further adds to your equity or ownership share in the house. 

This equity you build in your house can be used as collateral to borrow money from a home loan lender at a potentially lower rate than a personal loan. You can do this by refinancing your home loan for a bigger amount or taking out a home equity loan on top of your existing loan. However, you’ll still need a good credit score and prove to the lender that you’ll be able to repay the additional money you borrow to qualify.

Types of personal loans: secured and unsecured

Most personal loans are unsecured, meaning you don’t require any type of collateral as security. Lenders approve such loans based on your creditworthiness instead of relying on your assets as security. On the other hand, a secured personal loan is backed by one or more of your financial assets. Typically, people use their vehicles or home equity to secure a loan. However, depending on your lender, you might also be able to use your term deposits and high-value assets such as jewellery, art and antiques to secure your personal loan.

Naturally, unsecured loans pose a higher risk to lenders and are typically offered at higher interest rates than secured loans. Conversely, secured personal loans are generally cheaper and have higher borrowing limits, too. However, if you fail to meet your repayments on a secured loan, the lender holds the right to repossess your collateral (which could be your car or even your home) to make good their losses.

Can I get a secured personal loan using my home equity?

Yes, it's common for homeowners to use the equity in their homes as collateral to borrow money for various purposes. To apply, you'll be required to provide details of your mortgage and why you're taking out the loan. The amount you're eligible to borrow will depend on your credit score, personal income and liabilities, as well as the usable equity in your home. Typically, you're not allowed to borrow more than 80 per cent of the property's value. Therefore, the maximum amount you can borrow using your home equity (also known as usable equity) is 80 per cent of your home's current value minus the amount you owe on your mortgage. 

There's usually no restriction on what you may use the loan for. You can use the funds to renovate, buy a new car, plan your wedding or even go on a holiday. It's also possible to qualify for a personal line of credit using your home equity as security. 

 Since you're using the equity in your property as a security for the loan, you're also likely to qualify for a lower interest rate due to the lender's lowered risk. On the flip side, if you can't make the repayments, you risk losing your home and the equity you've built up over the years. One of the alternatives to taking out a second loan on your property is refinancing your mortgage to borrow against the equity in your house. 

If your property has appreciated in value since you purchased it, refinancing your home loan can help you increase your borrowing according to your property's new value. By switching loans, you can also try to secure a lower rate on your mortgage to clock more savings every month. However, it's important to remember that you're essentially borrowing more money, which will increase the size of your repayments unless you increase the loan term to keep your repayment amount the same. An increased loan term, however, means you'll be servicing the loan over an extended period and could end up paying more in interest payments overall. You can consider speaking with a broker to get expert advice on your situation.

If you only need a few thousand dollars, you may also consider redrawing any extra repayments made on your mortgage if there’s a redraw facility available to you. However, there might be a limit on the maximum amount or the number of redraws you can make depending on your loan agreement. Some lenders might also charge you a fee for a redraw facility.

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Product database updated 18 Jul, 2024

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