Making the most of the equity in your home – is an equity loan right for you?

As property prices continue to rise, more and more Australians are looking for ways to utilise the value they have built up in their homes over the years. Home equity loans are one such way that homeowners can take advantage of this hidden wealth. What is equity? Equity is the difference between the amount of money owing on your home loan and the value of your property. While the easiest and most obvious way your equity grows is when you make repayments on your mortgage, your equity will also change as the market, and property prices, fluctuate. What is an equity loan? Equity loans allow you to access the equity tied up in your property. Your lender will conduct a valuation, and based on the results, allow you to borrow a certain percentage of the equity you have built up. Depending on how long you’ve had your home loan, the funds you could access through an equity loan can be quite significant, making equity loans appealing to homeowners who want to renovate or think of purchasing an investment property. But while an equity loan may seem like the perfect solution to your financial needs, you should first ensure you fully understand how it will affect your financial standing. Benefits of using a home equity loan. Funds accessed through your home equity will usually be available at the same interest rate as your property, making it a much more appealing choice for those who would otherwise seek to finance their purchases through a credit card or personal loan. Taking advantage of your home equity with some smart financial decision-making can also further increase your assets, particularly if you are using the funds to further invest in property or renovate your current home. When used correctly, accessing home equity can be part of an intelligent wealth growth strategy. Important considerations.  Borrowing against the equity in your home means that you effectively increase the amount owing on your home loan, resulting in either higher repayments or a longer loan term. Before taking out a home equity loan, you should carefully consider how the additional repayments will factor into your long-term financial plan. After all, you are putting your home on the line if, for whatever reason, you are unable to make repayments in the future. Another important factor to consider is the interest you will end up paying over the course of the loan for any amount borrowed. Although the interest rate may be low, spread out over 20 or 30 years, the interest you end up paying could end up costing more than the purchase itself unless the borrowed amount is repaid quickly. When should I access my equity? Before deciding whether or not taking out a home equity loan is right for you, you should consult with an experienced financial advisor. That being said, some options for using your home equity are typically considered less risky or more beneficial than others. Generally speaking, wise use of your home equity would include:

• A deposit for investment property purchase
• Renovations to your existing property
• Debt consolidation
• Other investments such as shares, managed funds, etc.
• Higher education fees

Whereas other purchases may require some further consideration, such as:

• Small purchases
• Vacations
• Daily expenses

If you’re considering a home equity loan, speaking with a broker is a great first step toward understanding if this is the right type of finance for you.