Your home equity represents how much of your home you ‘own’. Put simply, it’s the difference between the amount that a bank values your property and the amount you still owe on your home loan.

Borrowing against your equity can be a lower-cost financing option compared to an unsecured loan, but equity loans aren’t right for everyone. To better understand their pros and cons, get across these handy tips from Marsha Strelow, a Senior Suncorp Bank Mobile Lending Manager.

Understand how equity loans work

With a Suncorp Bank Home Equity Loan, the loan amount can be as little as $10,000 and up to a maximum of 90% of your property’s value after fees have been considered. Unlike an ‘add’ loan, which increases the amount of your current home loan, an equity loan is a separate loan. This makes it easier to tailor your loan to its purpose.

If you choose to use over 80% of your property’s equity, keep in mind you’ll need to pay Lenders Mortgage Insurance, also called LMI (PDF). This is an extra cost you’ll pay on top of your equity loan repayments.

Why you might choose an equity loan over the alternatives

Compared to an unsecured personal loan or credit card, borrowing against your equity can usually help you take advantage of a lower interest rate. It could also be a good option if your home loan is still on a fixed rate. This is because you can’t add amounts onto your fixed rate home loan during this period, like you might with an add loan, for example.

But an equity loan can include a one-off fixed fee (called an establishment fee) and a higher minimum loan amount than a personal loan. The fee amount depends on your loan to value ratio (LVR) and the particular home loan product (e.g. whether you have a home loan package).

An equity loan must also be taken out over a minimum of eight years, which could mean a higher interest amount payable over the loan term than a comparable personal loan in some circumstances. This makes equity loans better suited for major expenses, such as property investment, debt consolidation, or other big purchases, like a new car.

Equity loans can be a popular choice for some home renovations

If you’re looking to improve your home and you’re still on a fixed rate loan – you may have just moved into a fixer-upper, for example -- an equity loan could be a good way to kick off renovations.

If you’re looking to increase the value of your home with your renovations ,Marsha believes that research should be a priority.

“If borrowing funds for home improvements, consider the value they’ll add to the property, as it isn’t always a dollar for dollar increase.”

This doesn’t mean going through your reno options with a fine tooth comb. Instead, discover what popular features and additions might not provide bang for your investment buck.

“For example, spending $50k on a pool may not add $50k to the overall value of your property,” Marsha says.

This is because getting the most out of renovations should always be about careful long-term planning – especially when it comes to equity loans.

“If borrowing for home improvements, consider how much is being spent and any potential risk of over-capitalising on property value,” Marsha says.

Choose the right loan term for your needs

At Suncorp Bank, equity loans provide the flexibility of a loan term of between 8 and 30 years. Applying for either the minimum or maximum can have perks, but Marsha says the right loan term really depends on your circumstances and the loan’s purpose.

This is particularly the case for smaller amounts.

“If you’re consolidating debt, for example, consider how interest expenses increase over longer terms.”

“You may also consider an equity loan for things that have a shorter life cycle, such as a car. In that case, a shorter loan term might make more sense.”

Learn more about equity loans

When it comes to deciding if an equity loan could be right for you, expert advice from lenders like Marsha can go a long way.

Suncorp Bank’s lending experts can help you understand your options. All consultations are 100% obligation-free.

Talk to a home loan expert

Published 11 January 2022