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.

Find and compare popular home loans

Sort By
Product
Advertised Rate
Comparison Rate*
Company
Monthly Repayment
Features
Real Time Rating™
Go to site

2.74%

Variable

2.76%

State Custodians

$685

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

2.70

/ 5
More details

2.90%

Variable

2.92%

State Custodians

$725

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

2.33

/ 5
More details

3.49%

Variable

3.50%

BCU

$1,500

Redraw facility
Offset Account
Borrow up to 90%
Extra Repayments
Interest Only
Owner Occupied

0.88

/ 5
More details

3.65%

Variable

3.66%

BCU

$1,526

Redraw facility
Offset Account
Borrow up to 90%
Extra Repayments
Interest Only
Owner Occupied

0.88

/ 5
More details

3.59%

Variable

3.81%

Aussie

$898

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.98

/ 5
More details

3.78%

Variable

3.82%

Qudos Bank

$1,547

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.80

/ 5
More details

3.78%

Variable

3.82%

Qudos Bank

$945

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.80

/ 5
More details

3.78%

Variable

3.82%

Qudos Bank

$945

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.80

/ 5
More details

3.78%

Variable

3.82%

Qudos Bank

$1,547

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.80

/ 5
More details

3.84%

Variable

3.89%

HSBC

$960

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.93

/ 5
More details

3.52%

Variable

3.90%

BankVic

$880

Redraw facility
Offset Account
Borrow up to 90%
Extra Repayments
Interest Only
Owner Occupied

0.77

/ 5
More details

3.69%

Variable

3.91%

Aussie

$923

Redraw facility
Offset Account
Borrow up to 90%
Extra Repayments
Interest Only
Owner Occupied

0.98

/ 5
More details

3.53%

Variable

3.92%

AMP Bank

$883

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.93

/ 5
More details

3.92%

Variable

3.96%

BankVic

$980

Redraw facility
Offset Account
Borrow up to 90%
Extra Repayments
Interest Only
Owner Occupied

0.77

/ 5
More details

4.10%

Variable

4.14%

Endeavour Mutual Bank

$1,025

Redraw facility
Offset Account
Borrow up to 95%
Extra Repayments
Interest Only
Owner Occupied

1.46

/ 5
More details

4.06%

Variable

4.18%

Coastline Credit Union

$1,015

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.88

/ 5
More details

3.99%

Variable

4.20%

Aussie

$998

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

1.10

/ 5
More details

4.19%

Variable

4.20%

BCU

$1,615

Redraw facility
Offset Account
Borrow up to 90%
Extra Repayments
Interest Only
Owner Occupied

0.88

/ 5
More details

3.80%

Variable

4.21%

Beyond Bank Australia

$1,551

Redraw facility
Offset Account
Borrow up to 90%
Extra Repayments
Interest Only
Owner Occupied

1.09

/ 5
More details

4.23%

Variable

4.29%

HSBC

$1,058

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

0.93

/ 5
More details

Learn more about home loans

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.

Reverse mortgages

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.  

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 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.

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 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.

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.

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

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

What is a draw down?

The transfer of money from a lending institution to a borrower. In a typical home loan, the funds are drawn down all at once in order to buy the property. In a construction loan, the money is drawn down in several stages to pay the builders as they progress through each phase of the project. In a line of credit loan, you can draw down money up to a limit based on your loan’s available equity.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.