SHORT-TERM HOME EQUITY LOANS: WHAT THEY ARE & WHY THEY’RE WORTH CONSIDERING
Recently updated on January 19th, 2024 at 06:49 pm
In this article, we’ll look at short-term home equity loans to include what they are, how they work, their uses and benefits, and finally how you can qualify for one.
What is a home equity loan?
A home equity loan uses the equity you have in your home to provide you with funds for a variety of purposes. Your equity is the difference between the current ‘fair market value’ of your home, and what you still owe on your mortgage. Equity is built up as you pay down your mortgage, and it will increase as the value of your home increases over time. You can then use this equity to access funds for a variety of purposes.
Home equity loans are popular in Australia, and are attractive as they typically have lower interest rates than other forms of finance. Traditionally, home equity loans had terms (five to 15 years duration). Though there’s now a growing demand for short-term home equity loans, which typically have a duration of 2 to 36 months.
How does a short-term home equity loan work?
A short-term home equity loan can be obtained if you have an existing mortgage, or own your home outright. Lenders will assess the amount of equity you have in your home and your capacity to repay in addition to your first mortgage. Generally, 70% of the property value minus any existing debt secured against the property.
What this means in real terms is, if you own a home worth $1 million, and you have a mortgage of $500,000, then you have $500,000 of equity. If you take out a short-term home equity loan, for a total of 70% LVR on the equity available, you can borrow up to $350,000.
Once approved for a short-term home equity loan, you will be expected to pay principal and interest each month over an agreed period of time.
What can you use a short-term home equity loan for?
Quick access to funds, often for short-term use, can be accessed using a short-term home equity loan. In Australia, borrowers can use equity in their home to borrow funds for a variety of purposes including:
- Home renovation: Renovations are one of the most common uses for short-term home equity loans in Australia, and are a great way to add value to your home. This strategy may be applied to prepare your home for sale, or to improve your lifestyle.
- Investment property purchase: A short-term home equity loan is commonly used as a deposit for an investment property (the balance of the purchase price is then secured against the new property).
- Debt consolidation: Short-term home equity loans can be used to consolidate multiple sources of debt and collectively pay off personal loans and credit cards.
- Pay a large bill: You might have a large tax bill, or school fees, that can be addressed through a short-term home equity loan.
- Business use: Short-term home equity loans may be used to help with working capital in a business, or to fund the purchase of inventory or stock to grow a business. A short-term home equity loan can also be used to fund a start-up business.
What are the benefits of a short-term home equity loan?
Typically, if you’ve owned your home for a number of years, it is likely that you have built up some additional equity. There are many benefits to tapping into this source of funding. Top of the list of benefits are the relatively low interest rate associated with this type of loan, compared to alternatives such as personal loans or credit cards. In addition, short-term home equity loans allow you to access a large amount of funds that align with the equity you have accrued in your property. Borrowers also love that applying for a short-term home equity loan is easy, as these loans require minimal paperwork and can often be applied for online. Lastly, short-term home equity loans are readily available from a wide range of lenders, including private lenders and fintechs.
What do you need to qualify for a short-term home equity loan?
In Australia, lenders will look at the following criteria before approving a short-term home equity loan:
- The amount of equity you have in your home (agreed home value less first mortgage)
- Your credit score (you can find out your credit score from a variety of providers in Australia)
- Other loans (personal loans, credit cards)
- Your household debt-to-income ratio
Importantly, what you think your home is worth may differ from its actual ‘fair market value,’ which is used to assess your equity. To understand the amount you can borrow against the equity in your home, lenders will obtain an independent appraisal to ensure you only borrow what’s aligned with the house’s market value.
Key takeaways
The equity you have built up in your home via repayments and increasing property values can be tapped into using a short-term home equity loan. Funds can be used for a variety of purposes, including personal and business use, and are secured against the equity you have in your home. Funds can be used for a short period of time, and in Australia you can apply online for a short-term home equity loan from a variety of lenders, including private lenders and fintechs.