EQUITY LOAN

A home equity loan allows you to borrow against the equity in your home to carry out renovations, pay bills, provide a deposit for a family member to purchase a property, invest in shares or add to your property investments. The loan is secured by your home or investment property provided you have enough equity. Equity is calculated as the difference between the value of your property less what you owe. For example, if you own a property valued at $650,000 and have an outstanding loan of $200,000, the equity would be $450,000. The amount you can borrow under an Equity Loan is determined by your income, assets, current outstanding debts and living expenses. Generally speaking, lenders prefer you to have an 80% Loan to Valuation Ratio or 20% equity after the equity loan has been drawn down, otherwise Lenders Mortgage Insurance (LMI) may be required.

Upside

  • An equity loan offers flexibility with the ability to draw down funds up to your credit limit, as needed without having to seek approval from your lender.
  • Interest expenses on an equity loan “may” be tax deductible if the funds are used to purchase an investment like shares or property for the purpose of earning an income including dividends and rent.
  • Interest rates are often significantly lower than the rates charged on credit cards, car loans & unsecured loans.
  • Easy access to your funds as most equity loans offer internet access, phone banking and cheque books.
  • Ability to consolidate your debts by paying them down using an equity loan.

Downside

  • The interest rate on an equity loan is usually higher than standard mortgage rates.
  • Equity loans require budgeting skills and discipline to ensure you stay within your financial limits.
  • If you struggle to manage your credit cards, an equity loan not something you should consider.
  • If you don’t need access to the funds and flexibility an equity loan provides, don’t apply for one.
  • Don’t spend the funds from an equity loan on spur of the moment purchases and assets that depreciate over time.
  • Drawing down funds from an equity loan may increase the time it takes you to pay off you home loan.
  • Because the equity loan is secured against your home, your property is at risk if you fail to make the necessary repayments.