Home is truly where the heart is, so if you feel like your living space is no longer the perfect fit for your lifestyle, then moving on to a home that is up-to-date with your long-term goals is the next big milestone to take.
Buying a second home with a home equity loan can provide a number of benefits, the most being you can cut back on your out-of-pocket budget. For example, some homeowners use a HELOC to fulfil their dream of owning a beach house.
Others may simply need to move onto a bigger home to better suit their growing families' needs. Whatever the case, it's important to understand the risks that come with using a home equity loan before turning a new leaf in Australia.
What is Home Equity?
Home equity is the difference between the resale value of your home and what is still owed on your loan. If you take out a home equity loan, you will be required to pay back the money you used plus interest. For example, if the value of your home is $250 000 and your current mortgage balance is $200 000, then you have $50 000 in equity, otherwise known as home equity.
Here is a formula that banks typically follow to calculate your available home equity:
(80% x market value of property) – home loan’s outstanding balance = available equity loan
What are the Factors to Consider to Access Your Home Equity in Australia?
1. You can Access Your Home Equity if You Paid Off More Than 20% of Your Current Property Value
Most banks and lenders will require that you paid more than 20 percent of your current property value in order to get a home equity loan. Some lenders may even allow you to make a partial deposit on the home equity loan, however, it will require a larger deposit on your end.
2. You can Access Your Home Equity if You Never Missed a Mortgage Repayment
If you have ever missed a mortgage repayment, a home equity loan might not be an option for you. In fact, it is a very bad idea to do so. Not only will you be losing out on the equity that you worked hard for, you are also putting your credit on the line.
Most lenders will base their decision on the stability of your loan. If you missed at least one mortgage payment in the last 6 to 12 months, then you may have trouble getting a home equity loan.
3. You can Access Your Home Equity if You Have a Stable Employment
So long as you can provide at least two of your most recent payslips as proof of your stable employment, then most lenders will be happy to move forward with your home equity loan.
4. You can Access Your Home Equity if You Don't Have Discrepancies in Your Loans
If you are looking to get a home equity loan, it is important that you have no issues with any of your existing loans. A home equity is purely based on money that you already own. If you cannot repay your HELOC, it is likely that you will also have issues repaying any other debts.
The Bottom Line: Understanding the Risks and Potential Benefits of Taking on a Home Equity for Your Second Home
Wondering if you should take out a home equity loan? Or are you interested in finding out more about how to use a home equity loan? Regardless of your questions or concerns, it's best to make an appointment with your lender to discuss your long-term goals. After all, only they can give you the correct answers to your questions.
A loan is only beneficial to you if you are able to make the required payments. Don’t take on a loan that you cannot afford to pay back. If you're unsure of whether or not you're ready to purchase a second home with a home equity loan, we strongly recommend that you speak to a financial advisor before making a decision.
How Can We Help You?
If you're looking for the best mortgage broker in Sydney, you've come to the right place because Wealthy You is here to assist you in your home buying journey.
Wealthy You is one of the leading mortgage companies in Sydney, offering various mortgage solutions that meet every client's needs. Since we're alternative lending specialists, we provide restructuring loans in Sydney that make refinancing your home simple.
Learn more about our services today!
