What is home equity, and how can I use it?

Your equity is the percentage of your home that doesn’t have a money owing on it. The more of your mortgage you can pay off, the more equity you can have in your home. Once you own your home outright, you will have 100 per cent equity. 

To find your equity, you can use the following formula

  • Current home value – outstanding mortgage = equity

For example, if your home is currently valued at $500,000, and you still have $300,000 to pay off on your mortgage, you have $200,000 in equity – in other words, you own 40 per cent of your property.

You can use the equity you own in your home as security to borrow more money. These home equity loans could offer you a range of options for managing your finances and enhancing your lifestyle.

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What is a home equity loan?

A home equity loan is where you use the equity in your home as security to borrow money.

There are two main types of home equity loan:

  • Lump sum – Similar to a personal loan, car loan or mortgage, this uses your equity as security to borrow a large sum of money, which you’ll pay back with interest over time.
  • Line of credit – Similar to a credit card, this let you borrow and repay money when you need it, up to a maximum limit based on your available equity. You’ll only be charged interest on the money you’ve borrowed.

Reverse mortgages

Another type of home equity loan is the reverse mortgage. Typically, only available to retirees who own their home outright, a reverse mortgage lets you access part of the value of your home as a lump sum or as a regular income stream. This money can be repaid whenever you choose, including when you sell your home, move into aged care, or pass away.

 

How can I use a home equity loan?

Depending on your financial situation, you may be able to use your home equity to access a lump sum or a line of credit to:

  • Consolidate debts – You may be able to clear maxed-out credit cards or other outstanding loans, and often pay a lower interest rate than you would by clearing each debt separately.
  • Improve the home – Paying for renovations, extensions, repairs or other construction projects around the house can help improve your quality of life and/or increase the property’s value
  • Invest in the future – Pay for education, start a business, invest in shares… there are a lot of options that could help you build wealth and/or value in the future.  
  • Pay for goods and services – Buy a car, pay for a wedding, go on holiday… however you choose to spend your money, you may be able to enjoy a lower interest rate than many personal loans or credit cards.

What is accessible equity?

It’s important to remember that just because you have equity in your home, that doesn’t always mean all of your equity is available for you to use.

Mortgage lenders typically want you to hold at least 20 per cent of your home’s value as security on your home loan. If you owe money on more than 80 per cent of your home’s value, whether it’s through your mortgage, a home equity loan, or both, you may need to pay for a lenders mortgage insurance (LMI) policy.

To find your usable equity, you can use the following formula: 

  • (Current home value x 0.80) – outstanding mortgage = usable equity

For example, if your home is currently valued at $500,000, and you still have $300,000 to pay off on your mortgage, you have $200,000 in equity. However, 80 per cent of your home value is $400,000, so once you subtract the $300,000 you still owe on your mortgage, you’ll have $100,000 available in usable equity.

How can I grow or increase my home equity?

The simplest way to increase the equity in your home is to pay off your mortgage. The more extra repayments you can make onto your home loan principal, the more equity will become available in your property.

If you’ve been keeping up with your home loan repayments for a few years, you may find that you have more equity available in your property than you expect. This is because equity is calculated using the current value of your home – if house prices have been rising in the local area, your property may hold more value today than it did when you first applied for your mortgage.

You may also be able to increase the value of your home (and your home equity with it) by renovating the property. This could be as simple as replacing old fixtures or as complex as replacing the kitchen or bathroom, adding bedrooms, or even putting an extra storey on your house.

You may even be able to use money from a home equity loan to pay for renovations. If they help increase your home’s value, you may find you have more equity available in the future to borrow more money when you need it. Just be mindful of the risk of overcapitalising, where the cost of the renovations is higher than the potential value increase.

How else can I use home equity?

There are other options available for using your home equity. As well as accessing a lump sum or a line of credit, your equity may be able to help you refinance your home loan, or take out a second mortgage for an investment property.

The more equity you have available in your home, the more security you may be able to offer a mortgage lender when you refinance. If your property’s value has increased and you have more equity available in your home, this may allow you to refinance to a home loan with a lower interest rate or fees, or that lets you access more useful features and benefits than your current deal.

You may be able to use your usable equity as security on a second mortgage to buy an investment property. A common rule of thumb is to look for an investment property priced at four times your usable equity, so your loan can cover the cost of the property plus stamp duty and other fees and charges.   

Some property investors purchase multiple houses using this strategy, using the equity in one property as security to purchase the next, and so on. Keep in mind that this strategy can be risky – if you find yourself unable to afford one loan, you could end up losing both properties.

Consider contacting a financial adviser and/or a mortgage broker before you look at buying an investment property with your home equity.  

Frequently asked questions

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

Mortgage Balance

The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

How will Real Time Ratings help me find a new home loan?

The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.

That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.

Best of all, the ratings are calculated in real time so you know you’re getting the most current information.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.

How does Real Time Ratings work?

Real Time RatingsTM looks at your individual home loan requirements and uses this information to rank every applicable home loan in our database out of five.

This score is based on two main factors – cost and flexibility.

Cost is calculated by looking at the interest rates and fees over the first five years of the loan.

Flexibility is based on whether a loan offers features such as an offset account, redraw facility and extra repayments.

Real Time RatingsTM also includes the following assumptions:

  • Costs are calculated on the current variable rate however they could change in the future.
  • Loans are assumed to be principal and interest
  • Fixed-rate loans with terms greater than five years are still assessed on a five-year basis, so 10-year fixed loans are assessed as being only five years’ long.
  • Break costs are not included.

What fees are there when buying a house?

Buying a home comes with ‘hidden fees’ that should be factored in when considering how much the total cost of your new home will be. These can include stamp duty, title registration costs, building inspection fees, loan establishment fee, lenders mortgage insurance (LMI), legal fees and bank valuation costs.

Tip: you can calculate your stamp duty costs as well as LMI in Rate City mortgage repayments calculator

Some of these fees can be taken out of the mix, such as LMI, if you have a big enough deposit or by asking your lender to waive establishment fees for your loan. Even so, fees can run into the thousands of dollars on top of the purchase price.

Keep this in mind when deciding if you are ready to make the move in to the property market.