As you pay off your home loan, you begin to build equity in your property. Australian homeowners often use this equity to acquire new loans to fund various projects or deal with specific financial situations. If you are retired and looking to release capital if would be worthwhile reading a report specific to this subject.
You may tap into the equity in your home to pay for emergency medical expenses, home renovations, or to consolidate your debt. However, before you use the equity that you have gained over the years, there are several important details to consider.
Accessing Equity Results in a New Home Loan
The most important detail to consider is the process of accessing equity. A home equity loan takes the place of your existing home loan. Your new home loan will include the remaining balance on your current home loan and the amount of equity that you accessed.
For example, if you have $200,000 remaining on your existing home loan for a property valued at $500,000, and you choose to access $200,000 from your equity, your new home loan amount would be $400,000.
While your new home loan may include a new term length, you may get a lower interest rate compared to your previous home loan. The equity that you have gained and your ability to complete repayments on time help to increase your chances of finding equity loan products with lower interest rates.
You May Only Access Up to 80 Percent of Your Equity
Another detail to consider is the amount of equity that you want to access compared to the value of the property. Typically, lenders may not approve an equity loan when the equity exceeds 80% of the property value.
For example, you have $200,000 remaining on your home loan for a property valued at $500,000. You have $300,000 in equity. However, you may not get approved if you seek more than $200,000 in equity. If the total of your existing loan and the equity that you want to borrow exceeds 80% of the property value, you may need to pay Lenders Mortgage Insurance (LMI).
Use an Equity Calculator to Estimate Your New Loan
The next consideration is your monthly repayments for your new home loan. To estimate these details, you can use an equity calculator which is provided by a number of online platforms such as Lendi or iSelect. You do not need to enter a lot of information. The calculator requires you to input the current value of your property and the remaining balance of your home loan.
After calculating your available equity, you can adjust the variable rate, loan term length, and amount of equity that you want to access to compare loans from other major lenders in Australia.
In the end, a home equity loan is a great way to fund your renovations projects, access extra cash, or even purchase a second property. However, you should be aware that you are taking on additional debt and securing the loan on your property. Your new loan may include a 25-year loan term, which means that your decision will have a long-term effect on your finances.
Always think carefully before restricting a home loan, and consider speaking with a home loan specialist for additional advice.