Home equity loans are a type of funding that allows homeowners to borrow against their home’s equity. Let’s look at how they work and how they are of benefit.
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What is a home equity loan?
A home equity loan uses the equity you have in your home to provide you with a lump-sum payment that can be used for a variety of purposes (equity is the difference between the current ‘fair market value’ of your home, less any mortgages or other loans secured by the property).
A home equity loan can be obtained if you have an existing mortgage, or own your home outright. The amount you can borrow through a home equity loan correlates with the amount of equity you own.There will be a limit to the amount of equity you can access or borrow against (usually around 70% of the property value minus any existing debt secured against the property).
Traditionally, home equity loans were for longer periods (often 5 years to 15 years). Though it’s becoming increasingly clear that longer-term loans do not always suit everyone’s circumstances – particularly for borrowers who may only need access to funds for a shorter period of time.
The good news is that there are a number of alternative and private lenders in Australia who provide short-term home equity loans, as well as bridging loans, which typically have a duration of 2 to 36 months.
Building up your home equity
Although you can’t borrow against the total amount of your equity, you can build up your equity to increase your wealth and the resources you can borrow against. A good way to boost your home equity is to make strategic renovations that improve both the value of your as well as your equity.
Common uses of home equity loans
A home equity loan is an increasingly popular type of funding for personal and business use. Home equity loans can be used to purchase an investment property, renovate your property, pay a large bill, as well as for debt consolidation and share investment. When used for business purposes, this loan can be utilised for the purchase of equipment or stock, general cash flow needs and payment of wages.
Here’s a bit more of an overview:
· Purchase of a real estate property
Many people use a home equity loan in Australia to extend their portfolio by purchasing an investment property.
· Fund home improvement projects
Using a short-term home equity loan for renovations that add value to your home is one of the most common uses for a home equity loan – particularly in preparation for the property’s sale.
· Paying large, often unexpected bills
A short-term home equity loan may be used to pay a one-off large tax bill, or assist with ongoing school fees.
· Business ventures
A lot of start-ups consider a home equity loan as seed funding for their business venture.
Getting a home equity loan
Many lenders allow borrowers to apply for a home equity loan online. The application criteria and processing times vary from lender to lender; fintechs, non-bank and specialist lenders tend to require less paperwork and have faster processing.
A home equity loan is a useful facility if you need it for personal and business use. It’s wise to speak with a mortgage broker to ensure you’re obtaining the most suitable loan for your requirements.