Often the home equity loans in Australia are regarded as secondary loans or second mortgages. These funds are generally used to finance major expenses like home renovation, weddings, private or tertiary education, etc.
A home equity loan is a type of loan in which the borrower uses home equity as the security for the funding. In other words, the current market value of the house minus the outstanding balance secures the loan.
Home equity loans in Australia are designed to be for a shorter term then the primary mortgage (+/- 10 years). However, these loans still follow stringent application procedures and an excellent credit history is paramount.
The biggest asset for most people is their home. Fortunately for home owners, the value of the house increases with time.
Banks are fully aware of the property ascending value and are ready to lend more money. The condition is that the house equity becomes the security for the loan.
The way home equity loans in Australia work is as follows: Bank evaluates the market value of the property and estimates the home equity (difference between the market value and the outstanding mortgage). Once the bank gets the value for the home equity, it will offer the loan. The amount of home equity loan in Australia is a percentage of the value of the home equity. For obvious economic reasons that percentage will never exceed 100%.
For many people this type of loan is the only way to borrow a lot of money.
Also, the term of the loan is often shorter than that of the mortgage.
There is also more flexibility to repay the money. However, the greatest benefit is the interest rate.
Because of the solid loan security (equity in home is used as collateral), banks are prepared to lower their interest value below that of the mortgage.
In fact longer you wait to apply for home equity loan in Australia, better is your home equity.
Therefore, the loan security (value of the house) improves with time. Thus, banks are happy to provide second mortgage on more favourable conditions. Finally, credits on home equity loans in Australia may be tax deductable. This is contrary to the main mortgage or personal loans.
The major disadvantage of home equity loan in Australia is a possibility to loose your house. The second is that the strong security in the loan attracts criminals posing as lenders. Therefore, it is very important to:
Despite the fact that the interest on the primary mortgage is usually higher, it is better to pay off the home equity loan first. The reason for this is that the term for the loan is shorter. Further, decreasing the home equity loan, decreases its interest.
Home equity loans are offered by all major banks and other lending institutions. Before you approach lenders you should get an idea about the value of your property.
The value of your property serves as the loan security. Thus, it will determine the condition for the loan.
Generally, you should expect to get a better interest on home equity loan in Australia than on a mortgage. If not, then shop around. However, do not let suspicious lenders seduce you with outrageously low interest rates.