Sunday, December 5 , 2021

What is short-term home equity and how can you use it?

Australians love to buy and sell the property. As such, many Australians prioritise upgrading their home or building up an investment portfolio. This sometimes includes minor property enhancements, but often involves significant renovations.

Many Australians use equity in their home to help fund these projects. And the good news is, that when it comes to short-term home equity loans, Australia has so many options to choose from.

In this article, we’ll be taking a closer look at just what home equity is and how you can use it to your advantage.

Home equity explained

The principle of a home equity is fairly simple: it is the difference between what your home is currently worth on the market (otherwise known as ‘fair market value’) versus how much you’ve paid off your mortgage.

Let’s look at a basic example. Your house is appraised, and it’s deemed to be currently worth $800,000, yet you still owe $300,000 on your mortgage (meaning you have paid off $500,000). This means you have $500,000 of equity in your home.

Just a word of caution: many homeowners have an inflated estimation of their property’s worth. Be careful not to fall into this trap as it can distort your expectations of the loan size you think you’ll be able to access. It’s worthwhile obtaining an independent appraisal to determine your property’s true market value to avoid this common mistake.

What is a short-term home equity loan?

A short-term home equity loan uses the equity you have in your home to provide you with funds that can be used for a variety of purposes.

A short-term home equity loan can be obtained if you have an existing mortgage, or own your home outright. Typically, you can borrow up to 70% of the property value minus any existing debt secured against the property. So, if we continue the example above, if you have $500,000 of equity in your home, you may be able to obtain a loan of up to ~$350,000.

Traditionally home equity loans were for longer periods (often 5 years to 15 years). Though it’s becoming increasingly clear that longer term loans do not always suit everyone’s circumstances – particularly for borrowers who may only need access to funds for a shorter period of time.

The good news is that there are a number of alternative and private lenders in Australia who provide short-term home equity loans, which typically have a duration of 2 to 36 months.

What you can do with the equity in your home

There are a number of reasons homeowners may consider a short-term home equity loan.

Aussies love to renovate and upgrade their living spaces. Though re-modelling is not cheap – so tapping into the equity in your home is a popular way of being able to finance home renovation projects, and by default, increase the value of your property.

A shortage of capital is a common challenge for small business. In this instance, home equity can be used to offset cash flow issues. Short-term home equity loans are often used to start a business, as well as keep it running in its initial stage of operations. In this instance, start-up capital is used for purchases (such as equipment or products), as well as keep the business running until it starts turning a profit.

A short-term home equity loan is often used as a deposit for an investment property. Property investors often employ this tactic to build their portfolios more quickly. The more properties you acquire, the more equity you build up in those properties, enabling an investor to consider purchasing even more properties.

Debt consolidation has also proven to be a popular way Aussies take advantage of their home equity. If you are struggling with several other debts, accessing your home’s equity can be a way of consolidating those debts to relieve the financial pressure of multiple monthly repayments and high-interest rates. Similarly, a short-term home equity loan may be used to pay a one-off large tax bill, or assist with ongoing school fees.

In conclusion

If you have built up equity in your home (via repayments and an increase in property value over time) and you need access to a large amount of funds quickly, a short-term home equity loan may be worth considering.

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