Are you thinking about taking out a home equity loan but don’t know where to start? If you own your home and have been paying off your mortgage, chances are you have some equity. You can borrow against equity to achieve a range of goals, from renovating your home, buying a car, or consolidating debt.

What is home equity?

Home equity is the difference between your property’s market value and the balance of your mortgage.

how does home equity work

You may accumulate equity in two ways – your home increasing in value – or paying down a significant amount on your mortgage.

Why choose an equity loan?

A home equity loan functions the same as any secured loan. This means that you will be able to borrow more money and obtain and a t a lower interest rate than with an unsecured loan.

Another benefit of an equity loan is accessibility. They are often paid out in cash, meaning you’ll have easy access to your money to use for any purpose.

Do I qualify for a home equity loan?

If you own your home (or have a mortgage) and have paid off more than 20%, you should be eligible. Having poor credit or any other encumbrances on your home may affect this outcome. Get in touch with the team at Swoosh to find out more.

What do people use equity for?

It’s entirely up to you what to use your equity loan for. People use them for a range of things.

  • Purchasing an investment property

You can use the equity on your house in place of a cash deposit when purchasing an investment property

  • Renovation and maintenance 

Using equity to improve your home is a great way to add even more value to your property

  • Other investments

Many people use their equity to invest in shares or managed funds that will pay dividends in the future

  • Acquire new assets

You can use your equity to buy a new car, boat or caravan

  • In place of a personal loan

Equity loans, in reality, can be used for anything, such as travel or living expenses, just like a personal loan

How does equity work when buying a new home?

If you are interested in buying a second home as an investment, you might want to consider using your equity as a deposit. Firstly, you will need to work out how much equity you have in your home. Secondly, you need to calculate if this is enough to cover a deposit on the new home you are interested in buying. IF that is the case, you will be able to use your home’s equity as a security deposit for your second property.

Is it better to refinance or get a home equity loan?

This is entirely dependent on your finance needs. When refinancing your house, you replace the terms of your current loan with new ones. If your current contract has great rates, refinancing might not be desirable. In this case, a home equity loan would be better. The only downside to that is the home equity loan remains separate, meaning you will have two separate repayments to make.

What do I need to consider?

There are a few things you need to keep in mind before taking out a home equity loan.

  • How much can you borrow without incurring Mortgage Lender’s Insurance 

This will be between 80 – 90% of your current equity value.

  • How much do you actually need to achieve your goals 

Be realistic about how much you need to borrow. Don’t borrow the maximum just because you can.

  • How much can you realistically afford to pay back 

Because a home equity loan uses your home as security, you need to ensure that you can afford your repayments. If not, you may need to foreclose on your property to repay the loan, and nobody wants that.

The bottom line is the same as with any line of credit. Don’t overextend yourself.

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How much can I borrow?

With an equity loan, you can borrow up to 80% of your available equity – meaning if your home has $100 000 worth of equity, you can borrow up to $80 000.

As we mentioned before, there are two ways to accrue equity – paying off your loan or increasing your home value. Therefore, if you want to borrow more money, it might be a good idea to get a property valuation to see if it has increased therefore increasing your borrowing power.

What do I need to provide?

Similar to obtaining other types of loans, you will need to provide evidence of your current situation and ability to repay the loan. You may also need to provide details for your current mortgage balance to show how you have calculated your equity balance.

If you have reached this point, you are best off getting in touch with a loan provider such as Swoosh Finance. They will let you know what documents are needed to obtain a loan.

Based on what you are using the loan for you may also need to provide:

  • Evidence of any debts you want to consolidate
  • Copy of contract of sale for an investment property you intend to purchase
  • Documents outlining a financial plan for share purchases
  • Documents outlining plans for renovations

This is where having a finance broker comes in handy. They’ll do the liaising with lenders on your behalf to make sure all the paperwork is submitted on time.

What are the benefits of a home equity loan?

As we mentioned before, a home equity loan means you can borrow more money at a lower interest rate. Another benefit is that obtaining the loan is relatively quick and easy. By borrowing against the value of your house lenders will be more confident in approving your loan. Things may be a little more challenging if you have a poor credit rating. You can improve your credit rating by paying back existing lines of credit before taking out a new loan.

Interest in improving your credit rating? Learn more about how to improve your credit score in NZ.

Are there drawbacks to a home equity loan?

Possible drawbacks to a home equity loan include falling property prices. If your property is overvalued or house prices fall overfall, you may find yourself owing more money on your home than it is worth. This is the reason that most lenders will only lend 80 – 90% of your equity value.

A solution to this problem is to not overextend yourself on your equity loan and make sure your property is fairly valued.

How do I apply?

It’s easy to apply online for a home equity loan at Swoosh Finance. Fill out the form online and one of our lenders will be in contact within 24 hours. Because we are a finance broker, we negotiate with the nation’s top lenders to find the best loan for your needs.


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