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Your home is your biggest asset and yet you may feel cornered in times of financial need, as it is not possible to only sell a part of the house to meet small emergencies. However, cashing in the equity built in your home can be a smart move to meet emergency expenses, invest in another property, take care of repairs and renovations or even fund a sabbatical or a holiday that you have been planning since ages.

Yes, an equity home loan allows you to use up to 80 per cent of the equity you have built in your home, either as a lump sum or a line of credit loan.

Especially as the property prices continue to soar, a second mortgage or an equity home loan may be a savvy option to consider. But, is it the right choice for you?

equity-pros-and-cons

We tell you the pros and cons of equity home loans to make an educated decision:

Pros

1. Lower interest rate – Using the equity in your home gives you easy access to cash at an interest rate much lower than your credit card. This cash can come in handy for urgent renovations, funding a business or an investment property or even for your child’s higher education without dipping into your other investments.

2. Fund renovations to further increase home equity – Renovations are really in, and if planned properly, they can significantly increase the value of your house, quickly building up your equity as a result. You can use your equity to renovate your house as well.

3. Building a property portfolio – Your home loan deposit can be a major deterrent as you decide to buy an investment property. However, many investors have built their property portfolios by using the equity in their home as a deposit for funding their investment property purchase. A smart idea, indeed! However, owever,a key point to remember here is that while the interest payments on your investment property are tax-effective, the repayments on your existing home loan are not. Thus, make an effort to pay off your existing loan quickly for better returns.

Cons

1. Set-up costs – An equity home loan, undeniably, comes at a lower interest rate than your credit card debt, but there are set-up costs involved, including application fee, lenders fee and other costs. Get in touch with a mortgage broker for discounts to score a better deal.

2. Increased debt – Having a second mortgage means taking on additional debt, meaning increased monthly repayments. Have you checked whether you can afford these additional repayments or not? (Calculate your monthly repayments by using our mortgage repayment calculator.) It may be a better idea to subscribe for a line of credit loan, especially for long-term renovation projects, as it allows you to borrow as much as you need (depending on the value of your property) and when you need.

3. Your home at stake – Using the equity in your home means losing the ownership you have built in it over the years. Inability to meet your mortgage repayments may also lead to foreclosure by the lender. Thus, it is important to analyze whether you really need the money from your equity or not. Have you checked if you can afford to service a second loan?

 

Equity home loans offer several advantages but are not bereft of risks that you must take into consideration before taking a call. That said, using the equity in your home to build a property portfolio or invest in high yielding stocks might actually make your money work harder for you. At HashChing, we help you find the best home loan deals in the mortgage market; our experts do all the legwork for you, while you save even more on your property purchase with the right home loan! Compare home loans now for the best deals on offer.

 

By Vidhu Bajaj

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HashChing is helping Australians by providing access to the pre-negotiated home loan deals. Obligation free consultation with one of our partner brokers might save you time, hassle and money.

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