Equity Home Loans
Equity home loans are referred to as a second home loan or a second mortgage. It is important for borrowers to understand the way that they operate and what purposes they can be used for.
Borrowers also need to consider advantages and disadvantages of equity home loans compared to other home loan products.
What is an equity home loan?
An equity home loan allow you to borrow against the equity in the home that grows over time. This occurs in multiple ways.
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By reducing the debt owed on the property by paying off your home loan over time.
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From the home increasing in value. This is also known as capital growth.
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By a lump sum payment that can be drawn on the property as a line of credit
There are two types of equity home loans.
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Lump sum equity loan where the borrower is allocated an approved amount that they can reborrow which will increase repayments over time.
2. A line of credit where the borrower has an approved amount that they can draw against over time as needed or based on there changing financial circumstances. In this case any repayment increase is calculated against any amount drawn down on the line of credit.
An equity home loan is secured against the value of the borrowers property which acts as security to reduce the risk to the lender.
How does an equity home loan work?
Lenders have different lending policies and the amount that they are prepared to lend on this type of loan may vary. Generally, most lenders will be prepared to lend up to 80% of the properties value.
This percentage is known as the loan to value ratio (LVR).
For an example, a lender with a policy to lend you 80% LVR on a property worth $500,000 is $400,000. If the borrower has a mortgage of $300,000 then the bank will consider lending you an additional $100,000 in the form of a lump sum or a line of credit.
What can I use an equity home loan for?
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Renovations
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For investments such as a purchase of a business or property
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Potentially any purpose
What Are The Advantages and Disadvantages of Equity Home Loans?
Equity home loans have both advantages and disadvantages. Whether you consider this type of home loan products depends on:
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Your personal financial circumstances.
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What you intend to use the funds for.
Equity home loan advantages
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Lower interest rates compared to other loan products like credit cards or personal loans due to the level of security that the borrowers property provides.
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Easier approval process than some other home loan products.
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Equity home loans provide borrowers with flexibility as the funds can be used for any potential purpose.
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Unlocking equity may provide borrowers with other income streams, tax benefits and capital growth.
Equity home loan disadvantages
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Taking out equity means more debt.
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Equity home loans can attract additional fees and charges.
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There are more risks involved compared to other home loan products, depending on how the funds will be used.
What risks are involved with equity home loans?
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In a worst case scenario the borrower can lose their property if they default on repayments.
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If the funds are not used for investment purposes then this can have worse long term effects for borrowers
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Ill disciplined borrowers can misuse the funds causing future financial stress and unnecessary debt.
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You can over capitalise if funds are used for renovations.
Is a reverse home loan or reverse mortgage a type of equity home loan?
Yes. Some home loan lenders will also provide a variation of an equity home loan which is known as a reverse home loan or reverse mortgage. This variation allows a property owner to give up equity in their home to the lender in exchange for a lump sum, a line of credit or repayments to an existing loan on the property.
Just like other home loans, an equity home loan is secured against the property of the borrower. This security lessens the lender's risk of providing the funds to the borrower. This type of equity home loan is normally utilized by retirees who need to maintain cashflow for their daily living requirements.
While no repayments are made on a reverse home loan or reverse mortgage, the lender will charge interest on any funds provided which must be paid in full whenever the property is sold or the owner moves to age care or passes away.
What's the Yellow Line?
Buying a home is likely to be the largest financial decision you will make. There are a vast range of products and banks are extremely competitive. It is best to seek professional financial advise to ensure you obtain the most appropriate home loan product for your needs.
Yellow loans has a vast range of lenders with a range of products to achieve the best results on obtaining the best home loan deal for you. You can contact us here and we can get your future looking bright.