Using home equity is a popular method that many Australians use to purchase a second property. When used properly, leveraging your home’s equity can be a great way of building long-term wealth.
If you are a homeowner and you are looking to purchase another property, whether it is for investment purposes or your own pleasure, this blog is for you.
In this article, we will talk about what home equity is, the types of property you may use home equity on, and the different factors to consider before using your home equity.
What is home equity?
Home equity is the value of your home minus the debt that you owe on the property. Home equity tells you the proportion of the property that you own outright.
For example, Dylan owns a $500,000 home and has $300,000 worth of debt remaining. That means Dylan’s home equity is $200,000.
In other words, Dylan owns $200,000 worth of his home and still needs to pay $300,000 to his lender.
Types of property to purchase
If you have an adequate amount of equity in your home and your lender approves the use of home equity, here are some properties that you may purchase:
- Buy-to-let (to rent out to tenants)
- A second holiday home or holiday home
- A holiday let (to rent out for shorter periods)
- A commercial property
- A home for a child or another family member
Factors to consider
Before you start searching for your second property, there are many factors to consider. From equity to risks, you should consider all factors to see if using home equity is the right option for you.
It is also beneficial to work with a reputable lender and get professional advice from a mortgage broker or financial adviser. One Click Life is here to help you on your journey and can provide advice on all your mortgage needs.
Equity
The amount that you can borrow depends on the amount of equity in your current property. Banks typically allow you to use up to 80% of the value of your home to purchase your second property. This is known as useable equity.
For example, using the figures in the “What is home equity” section of a $500,000 home, 80% of the home is $400,000. After you minus the amount owed to the bank ($300,000), you have $100,000 of usable equity.
Lenders
Not all lenders offer home equity loans. If you are looking for a home equity loan you need to talk to your lender or shop around for a lender that offers the product. One Click Life is a mortgage broker that can help you find the right lender that suits your specific needs.
Interest rates
Interest rates can differ significantly between lenders, so it is important to compare rates and fees that are on offer to ensure you get the best deal. Interest rates for home equity loans are typically higher than regular mortgages as lenders are taking on more risk.
Interest rates can fluctuate over time, meaning you may pay significantly more on your loan payments in the future. With that in mind, you should only borrow what you can comfortably afford.
Repayment
You will need to make regular repayments on your loan, which can put a strain on your finances. Before you take out a loan on your home equity, you should ensure that the repayments are manageable and won’t put you into financial distress.
Look at your current financial situation, such as your income, expenses, and the potential changes that will affect your ability to make repayments. Will you be able to continue to make repayments for years to come? These are all factors to consider before taking out a loan. Risks: One of the most significant risks to using home equity loans is the risk of your lender repossessing your home. If you fail to make repayments, you may incur additional fees and charges that can damage your ability to borrow in the future. You should keep in mind the worst-case scenarios and have a plan of action that can mitigate the risks if or when they occur.
One Click Life: More than just a mortgage broker
If you are in the market for a mortgage, One Click Life can help you choose the right mortgage provider so you can save more money.
Not looking for a mortgage lender? One Click Life can also take care of your Taxes, Will, and Health Insurance. Claiming your tax return online is an easy process with One Click Life. The best part is you can claim your online tax agent fees back on your online tax return.