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House prices have risen rapidly across most of Australia, giving home owners a readily available and inexpensive source of credit.

A home equity loan allows you to borrow against the equity you have in your home to either invest in shares, repay your debts, renovate, pay for lifestyle expenses or buy another property. The loan is secured by a mortgage over your home and in most cases you can use as little or as much of the loan, if and when you need it. Equity loans have been very popular in recent years, due to their flexibility.

1) What is ‘Cash-Out’?

2) Which Loan purposes are considered ‘Cash-out’ and which are not?

3) Can I get ‘Cash-Out’ from my property?

4) Can I release equity to buy an Investment?

5) What is ‘Equity’?

6) How can I calculate my equity?

 

Getting access to your Equity

You can access your equity with a home equity loan. This may be subject to certain ‘Equity Release restrictions- also known as cash out restrictions.The funds released can then be used for any worthwhile purpose including renovating your home, investing in property or consolidating debts.

1) Why don’t banks like ‘cash out’?

2) What can I use the equity in my property for?

3) What can an Equity Loan NOT be used for?

4) Who is an equity loan for?

Equity Loan for Debt Consolidation

One of the most common reasons that people release their home equity is to roll all of their expensive unsecured debts into one low monthly repayment. The interest rate on credit cards ranges from 10% to 30%, and for personal loans the rate can be anywhere from 8% to 15%. By consolidating these debts into your home loan  ( currently 4% to 7%) you can significantly reduce the ongoing repayments and save a small fortune in interest. If you wish to consolidate your debts with a major lender you must have made all of your repayments on time in the last month for your unsecured debts and on time for the last six months for your current home loan.

You may need to prove the purpose of your Equity Loan.

As part of the application process and depending on the lender you choose, the amount you need and the purpose of your loan, you may have to provide .some evidence. such as:

  • Buying shares: An accountant’s letter, copy of a plan or statement of advice from a financial planner.
  • Buying a property: A letter from your conveyancer confirming you are looking for a property or a copy of the contract of sale when a property is found.
  • Debt consolidation: One recent statement for each of your debts that are being repaid.
  • Renovations: A copy of the building contract or quotes from the contractors that you are using.

Low-Doc Equity Loan

Releasing your equity with a low doc loan is particularly difficult as lenders do not have evidence of your income or what you are doing with the loan funds. You can release equity with a low doc loan for up to 60% of your property value. Releasing up to 80% MAY be possible with a few select specialist lenders at a higher interest rate. Most Low –Doc lenders will not require you to submit tax returns or full financials if you sign a declaration confirming your income. The lender can then assess your loan using the declared income. Although most lenders do not charge a higher rate for low doc loans they may charge you LMI – Lenders Mortgage Insurance- as a one off fee when the loan is set up. for loans over 60% of the property value. For more information on Low-Doc Loans , Please go to ‘Types of Loans’.

Are the interest rates and fees higher for an Equity Loan?

Equity Home Loan Traps

Beware of Line of Credit loans: Because you can access your equity via any ATM, it can become increasingly difficult to spend responsibly. If you feel that this may cause you future financial problems, then consider a 100% offset home loan instead.

You should only consolidate debt once or twice in your lifetime.: If you need to consolidate debt more often than this then the problem may be your spending habits. Once you have completed a debt consolidation loan then do not apply for any more credit cards or personal loans. otherwise you can end up in a cycle of spending and consolidating which will only result in you losing your equity. In extreme cases people continue to borrow to fund their lifestyle right up until they reach retirement age, yet are unable to retire as they still have a mortgage .to pay

You can’t release equity that you don’t have: If you only purchased your home in the last year or two then it is unlikely that you have any equity to release.

Types Of Equity Loans

As a general rule equity loans are used when you are releasing equity from your home to buy shares, buy a property, renovate or consolidate debts. In these cases you may use a 100% offset home loan or Line of Credit. There are however several other types of Equity Loans such as a shared equity loan, property share loan, or seniors equity loan which is also known as a reverse mortgage. Read on to find out more about how these types of loans work and when they should be used.

1) Should I go for a Line of Credit or a 100% Offset Home Loan?

2) Which banks/lenders do ‘Line of Credit’ Equity Home Loans?

3) What’s a ‘Shared Equity ‘ Loan?

4) What’s a ‘Property Share’ Loan?

5) What’s a ‘Seniors Equity ‘Loan?