How Australian Home Equity Loans Work
Put very simply, a home equity loan is a home loan where the amount is borrowed against equity in your home.
Home Equity Loan Downsides
Home equity isn't without it's downsides however. If you default on your payments you can lose your home to the bank, as the bank will essentially sell your home to pay out the loan. While this sounds simple enough, it's a harrowing experience and many people have been through this situation. To make matter worse, you might find the property market now living up to your expectations and you will not get the price you thought your house was worth. For these reasons, the decision to take out a home equity loan should be made with care.
You will also decrease your home equity and your home loan repayments will take longer to finalise, or increase as a result.
The Upside of Home Equity Loans
On the other side of the coin, the equity loan can be an amazing thing. Borrowing wisely, you can fund renovations or even basic loans that you really can't go without. If you borrow correctly, you should really be increasing your home's equity, or taking on a non-depreciating asset and increasing your overall wealth in the process. Another thing to consider is income tax in this equation, however, done right, the equity loan is a really good thing.
An equity loan will generally be lower interest than a personal loan and can be tax deductable in some situations, whereas a personal loan might not be.
Equity Loan Tips
- Don't over borrow, your lender will be able to help you with this
- Try and spend the money on necessary bills you can't pay ANY other way, or appreciating assets
- Increasing your home equity with the principle amount is a really good idea
- Don't ever default and have a back up plan. Nobody wants you to lose your home (well, the banks might)
- Remember the severity of a default and make the above decisions in a sound mind.
- Good luck!!