What is a Home Equity Loan?
A home equity loan is like a credit card but much, much cheaper. You can withdraw funds from the Equity Loan to purchase things like cars, boats, holidays, home renovations and much more. The catch is the Bank registers an interest in your property for the borrowed amount just like they do for a normal home loan. This gives them the guarantee of repayment and is why they can afford to offer interest rates much lower that you would typically see for personal finance.
A common use for home equity loans is for investing. Instead of using personal savings for your deposit, a home equity loan allows you to purchase a second mortgage for a new property secured by an asset, such as your existing property. By using your home equity line of credit, you could increase the size of your portfolio, or make a lifestyle purchase.
Here is a scenario from one of our past customers. Ben wants to purchase an investment property for $400,000. Traditionally, he would need a minimum deposit of $40,000. However, Ben has the following equity in his current home:
- Current Property Value: $540,000
- Outstanding to pay on mortgage: $340,000
- Current Equity: $200,000 ($540,000 - $340,000)
Instead of having to save up $40,000 for a deposit, he is able to take this equity from the amount he owns on his existing home. This $40,000 is essentially redrawn from your current mortgage, meaning you now owe $380,000 on your mortgage for the house you are currently living in. Your equity in this house is now $160,000, although this drop in equity is now been moved to an increase in equity in your investment property.