Factors to Consider Before Applying for an Equity Loan
Recently updated on January 10th, 2023 at 05:50 pm
House prices still climbing in many parts of Australia place many homeowners in a strong position to access a readily available source of credit: the equity in their home.
Home equity loans in Australia let you borrow against the equity you have in your property. The equity in your home is the value of your property minus how much you still owe on the mortgage. Or in other words, equity is the amount of your home that you actually own. You’re also building your equity with every repayment you make while also reducing your loan balance.
Here are some factors to think through if you’re considering applying for an equity loan.
1. Assess your finances
The first step is to assess your current financial situation, as lenders will examine your ‘financial health’ and creditworthiness when considering your application for an equity loan. This includes your credit history (and whether you’ve had any defaults), your employment and other sources of income, your expenses, the amount of equity you have available in your home, and your exit plan (your ability to repay the loan).
2. Determine how much home equity you have
It’s important to have a realistic expectation of your home’s market value. Be aware! Many borrowers make the mistake of having an inflated expectation of the property’s true value (and therefore expecting to be able to access a greater amount of equity). It’s wise to get an independent appraisal to overcome this possible perception gap and make sure you have sufficient equity in your home before applying for a loan.
3. Know the exact amount you need to borrow
It sounds obvious, but be realistic about the amount you need to borrow to achieve a specific purpose – taking out the ‘guesswork’ as much as possible. For instance, have renovations quoted in advance if the equity loan is for this purpose.
4. Consider your ability to pay the equity loan
It’s wise to determine your ability to comfortably repay the equity loan with a finance broker or accountant to ensure you don’t become overstretched.
What are some common uses for a equity loan?
Equity can be used for a variety of purposes. Here are a few common uses:
- Home renovations
- Paying off debt
- Investing in your business, shares, stocks or managed funds
- Buying a business or another property
- Paying for medical expenses
It’s also worth keeping in mind that lenders will often consider the purpose of the loan when assessing your application. Generally, non-bank and private lenders tend to be more flexible with their loan criteria and processing time than traditional financial institutions.
Key takeaway
A home equity loan uses the equity in your home to give you access to funds. A home equity loan can be used for various purposes, like renovations or go toward purchasing another property.
Mango Credit
Yanis Derums is the Founder and Director of Mango Credit– a leading private lender specialising in bridging loans for personal use and business short term loans for commercial and/ or investment purposes. Yanis has extensive experience with financial analysis, credit assessment, product structuring, and general business management