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What is home equity, and how can I use it?
Your equity is the percentage of your home that doesn’t have a money owing on it. The more of your mortgage you can pay off, the more equity you can have in your home. Once you own your home outright, you will have 100 per cent equity.
To find your equity, you can use the following formula
- Current home value – outstanding mortgage = equity
For example, if your home is currently valued at $500,000, and you still have $300,000 to pay off on your mortgage, you have $200,000 in equity – in other words, you own 40 per cent of your property.
You can use the equity you own in your home as security to borrow more money. These home equity loans could offer you a range of options for managing your finances and enhancing your lifestyle.
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What size home loan can I afford?
Buying a new home is a big decision, and is one of the most expensive investments of your life, too. But before you even start to look for that dream home, you should find out how much you can borrow. This will help you narrow down your search and get an idea of what your repayments will look like in the future.
What is a home equity loan?
A home equity loan is where you use the equity in your home as security to borrow money.
There are two main types of home equity loan:
- Lump sum – Similar to a personal loan, car loan or mortgage, this uses your equity as security to borrow a large sum of money, which you’ll pay back with interest over time.
- Line of credit – Similar to a credit card, this let you borrow and repay money when you need it, up to a maximum limit based on your available equity. You’ll only be charged interest on the money you’ve borrowed.
Another type of home equity loan is the reverse mortgage. Typically, only available to retirees who own their home outright, a reverse mortgage lets you access part of the value of your home as a lump sum or as a regular income stream. This money can be repaid whenever you choose, including when you sell your home, move into aged care, or pass away.
How can I use a home equity loan?
Depending on your financial situation, you may be able to use your home equity to access a lump sum or a line of credit to:
- Consolidate debts – You may be able to clear maxed-out credit cards or other outstanding loans, and often pay a lower interest rate than you would by clearing each debt separately.
- Improve the home – Paying for renovations, extensions, repairs or other construction projects around the house can help improve your quality of life and/or increase the property’s value
- Invest in the future – Pay for education, start a business, invest in shares… there are a lot of options that could help you build wealth and/or value in the future.
- Pay for goods and services – Buy a car, pay for a wedding, go on holiday… however you choose to spend your money, you may be able to enjoy a lower interest rate than many personal loans or credit cards.
What is accessible equity?
It’s important to remember that just because you have equity in your home, that doesn’t always mean all of your equity is available for you to use.
Mortgage lenders typically want you to hold at least 20 per cent of your home’s value as security on your home loan. If you owe money on more than 80 per cent of your home’s value, whether it’s through your mortgage, a home equity loan, or both, you may need to pay for a lenders mortgage insurance (LMI) policy.
To find your usable equity, you can use the following formula:
- (Current home value x 0.80) – outstanding mortgage = usable equity
For example, if your home is currently valued at $500,000, and you still have $300,000 to pay off on your mortgage, you have $200,000 in equity. However, 80 per cent of your home value is $400,000, so once you subtract the $300,000 you still owe on your mortgage, you’ll have $100,000 available in usable equity.
How can I grow or increase my home equity?
The simplest way to increase the equity in your home is to pay off your mortgage. The more extra repayments you can make onto your home loan principal, the more equity will become available in your property.
If you’ve been keeping up with your home loan repayments for a few years, you may find that you have more equity available in your property than you expect. This is because equity is calculated using the current value of your home – if house prices have been rising in the local area, your property may hold more value today than it did when you first applied for your mortgage.
You may also be able to increase the value of your home (and your home equity with it) by renovating the property. This could be as simple as replacing old fixtures or as complex as replacing the kitchen or bathroom, adding bedrooms, or even putting an extra storey on your house.
You may even be able to use money from a home equity loan to pay for renovations. If they help increase your home’s value, you may find you have more equity available in the future to borrow more money when you need it. Just be mindful of the risk of overcapitalising, where the cost of the renovations is higher than the potential value increase.
How else can I use home equity?
There are other options available for using your home equity. As well as accessing a lump sum or a line of credit, your equity may be able to help you refinance your home loan, or take out a second mortgage for an investment property.
The more equity you have available in your home, the more security you may be able to offer a mortgage lender when you refinance. If your property’s value has increased and you have more equity available in your home, this may allow you to refinance to a home loan with a lower interest rate or fees, or that lets you access more useful features and benefits than your current deal.
You may be able to use your usable equity as security on a second mortgage to buy an investment property. A common rule of thumb is to look for an investment property priced at four times your usable equity, so your loan can cover the cost of the property plus stamp duty and other fees and charges.
Some property investors purchase multiple houses using this strategy, using the equity in one property as security to purchase the next, and so on. Keep in mind that this strategy can be risky – if you find yourself unable to afford one loan, you could end up losing both properties.
Consider contacting a financial adviser and/or a mortgage broker before you look at buying an investment property with your home equity.
Property Personal Finance Writer
A property and personal finance writer, Nick Bendel covers property, loans, credit cards, superannuation, and other bank products. Nick has previously written for The Adviser, Mortgage Business, Lifehacker, Business Insider, Yahoo Finance, and InvestorDaily, and loves getting elbow-deep in the latest ABS, APRA and RBA data.
Frequently asked questions
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.
What is a line of credit?
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 much deposit do I need for a home loan from ANZ?
Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:
- A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
- The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
- If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).
Can I apply for an ANZ non-resident home loan?
You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:
- You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
- Your job is included in the Australian government’s Medium and Long Term Strategic Skills List.
However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.
Can I get a NAB home loan on casual employment?
While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).
While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.
Remaining loan term
The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.
How long does Bankwest take to approve home loans?
Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.
Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.
What are the pros and cons of no-deposit home loans?
It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.
The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.
But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.
Will I have to pay lenders' mortgage insurance twice if I refinance?
If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments.
If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.
How much can I borrow with a guaranteed home loan?
Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.
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.
Are bad credit home loans dangerous?
Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.
Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).
That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.
What if I can't pay off my guaranteed home loan?
If you can’t pay off your guaranteed home loan, your lender might chase your guarantor for the money.
A guaranteed home loan is a legally binding agreement in which the guarantor assumes overall responsibility for the mortgage. So if the borrower falls behind on their mortgage, the lender might insist that the guarantor cover the repayments. If the guarantor fails to do so, the lender might seize the guarantor’s security (which is often the family home) so it can recoup its money.
What are the responsibilities of a mortgage broker?
Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.
In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).
These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for, actually meet your needs, and don’t prove unnecessarily challenging for you.
Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.
How can I get a home loan with bad credit?
If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.
One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.
Two points to bear in mind are:
- Many home loan lenders don’t provide bad credit mortgages
- Each lender has its own policies, and therefore favours different things
If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.
Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:
- You have a secure job
- You have a steady income
- You’ve been reducing your debts
- You’ve been increasing your savings
How do guaranteed home loans work?
A guaranteed home loan involves a guarantor (often a parent) promising to pay off a mortgage if the principal borrower (often the child) fails to do so. The guarantor will also have to provide security, which is often the family home.
The principal borrower will usually be someone struggling to find the money to enter the property market. By partnering with a guarantor, the borrower increases their financial power and becomes less of a risk in the eyes of lenders. As a result, the borrower may:
- Qualify for a mortgage that they would have otherwise been denied
- Not be required to pay lender’s mortgage insurance (LMI)
- Be charged a lower interest rate
- Be charged less in fees
How can I get ANZ home loan pre-approval?
Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget.
At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.
An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.
You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).
Why should I get an ING home loan pre-approval?
When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you.
Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.
Does Australia have no cost refinancing?
No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.