First Mortgage vs Home Equity Loan: Unveiling Differences

By: Aaron Robbins0 comments

When it comes to financing a property in Australia, two common options are first mortgages and home equity loans. Both of these financial instruments offer prospective homeowners the opportunity to access funds for various purposes. However, understanding the differences and benefits of each is crucial in making an informed decision.

In this article, we will explore the characteristics and differences of first mortgages and home equity loans.

First Mortgages

A first mortgage, also known as a home loan, traditional mortgage or a primary mortgage, is the initial secured loan taken out to purchase a property — a lump sum is provided and then the borrower repays the loan amount and will pay interest on the outstanding balance. Mortgage lenders typically offer first mortgages with varying interest rates and terms, tailored to the borrower’s financial situation.

It is incredibly rare to purchase a home outright in Australia, many Aussies rely on being able to borrow money to get into their first home. How much money they need to borrow though does depend on the purchase price of the home, their income and how much they’ve been able to save.

Loan amounts

The loan amount is usually based on a percentage of the property’s value, known as the loan-to-value ratio (LVR). In Australia, first mortgages often require a minimum deposit of 5-20% of the property’s purchase price. The higher the deposit, the lower the LVR, which can result in more favourable interest rates and loan terms.

Interest rates

First mortgages in Australia generally have fixed or variable interest rates. A mortgage with a fixed interest rate may offer greater stability in repayment, with a locked interest rate for a specific period, usually ranging from one to five years. On the other hand, variable-rate mortgages fluctuate with market conditions, providing the potential for savings if interest rates decrease.

Repayment terms for first mortgages can extend up to 30 years in Australia. Homeowners typically make regular monthly repayments, which include both principal and interest (P&I) components. Over time, as the mortgage is paid down, the borrower builds equity in the property as the owing amount reduces and the property value (typically) increases.

Home Equity Loans

A home equity loan, which are commonly referred to as a second mortgage, is a loan that allows homeowners to borrow against the equity they have built in their property. Equity is the difference between the property’s current market value and the outstanding balance on the first mortgage.

When to use a home equity loan?

Home equity loans are commonly used as a way to tap into a property owner’s accumulated equity for various purposes, such as home renovations, debt consolidation, or investing in other properties. Business owners may use a home equity loan to help boost working capital, expand their business, fund large purchases or cover ATO debt.

Loan amount

At DFS, we can lend up to 80% of your home’s equity. This could potentially equate to more than would be accessible through other types of personal or business finance.

Comparison: First Mortgages vs. Home Equity Loans

  1. Purpose: First mortgages are primarily used to finance property purchases, while home equity loans allow homeowners to access funds for other purposes.
  2. Loan structure: First mortgages are larger loans based on the property’s purchase price, while home equity loans are smaller loans based on the available equity in the property.
  3. Interest rates: First mortgages offer both fixed and variable rates, whereas home equity loans typically have variable rates.
  4. Loan-to-Value Ratio (LVR): First mortgages require a minimum deposit, while home equity loans are based on the existing equity in the property.
  5. Repayment terms: First mortgages generally have longer repayment terms, up to 30 years, while home equity loans often have shorter terms, typically up to 15 years.

In Australia, both first mortgages and home equity loans offer homeowners the ability to leverage their property for financial purposes. First mortgages enable property purchases, while home equity loans provide access to accumulated equity for various needs. Understanding the differences between these options, including interest rates, loan structure, repayment terms is vital when considering which financing solution is most suitable for your personal needs.

Talk to the team at Diverse Funding Solutions about your lending needs

With access to over 200 of Australia’s top private lenders, and the flexibility and fast funding that business owners and homeowners seek, Diverse Funding Solutions is becoming one of Australia’s leading private finance brokers.

At DFS, we specialise in both first mortgages and home equity loans — talk to our team about how we can work with you to find the most suitable funding solution for you!

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Frequently asked questions

How is the interest rate determined for a first mortgage?

The interest rate for a first mortgage is typically based on factors such as the borrower’s credit score, loan-to-value ratio, and market conditions. It can be either fixed or variable, depending on the terms of the loan.

How is the interest rate determined for a home equity loan?

The interest rate for a home equity loan is also generally determined by factors such as the borrower’s creditworthiness, the amount of equity in the property, and market conditions.

How do the repayment terms differ between a first mortgage and a home equity loan?

First mortgages typically have longer repayment terms, commonly ranging from 15 to 30 years. Home equity loans, on the other hand, often have shorter terms,. At DFS, we offer home equity loans between 2 months and three years.

Can I qualify for a home equity loan if I have a first mortgage?

Yes, it is possible to access a home equity loan even if you have an existing mortgage. The amount you may be able to borrow will depend on factors such as the equity in your home, your financial situation and the lender’s criteria.

Do all mortgage lenders offer first mortgages and home equity loans?

Not all mortgage lenders will offer both primary mortgages and home equity loans. It is generally considered to be a good idea to ensure that you conduct due diligence with different lenders to assess which lender will be the best suited to your personal and financial situation.

For borrowers with a poor credit history, private lenders are typically the preferred option, as a credit check isn’t always necessary.

 

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