Home Equity Loans: Pros and Cons

By: Aaron Robbins0 comments

If you’re a business owner seeking ways to access more capital to propel your business forward, you may have stumbled across home equity loans. A home equity loan is a flexible and fast way to access cash using the equity that’s tied up in your home’s value.

Like most financing options, though, there are benefits and some things to consider carefully before taking out a home equity loan. We step through some of the pros and cons of home equity loans so that you can make a more confident financial decision.

What is a home equity loan?

A home equity loan is a funding solution similar to a second mortgage that enables you to take a lump sum loan, using the available equity in your home as collateral. When you access a home equity loan through Diverse Funding Solutions, you can access up to 80% of the available equity in your home.

With house prices having risen drastically over the past few years, it’s possible that you have more equity than ever before sitting in your home’s value. Leveraging your home’s equity to borrow funds can give you an unprecedented opportunity to meet your lifestyle or financial goals sooner.

What are the pros and cons of home equity loans?

We take a look at some of the pros and cons of using home equity loans.

The benefits of home equity loans

Flexibility

One of the biggest advantages of home equity loans is their flexibility. Unlike other forms of secured debt that restrict what you can use the loan funds for, a home equity loan allows you one lump sum that can be used to:

Consolidate debt

With interest rates on other forms of personal and business finance, your existing repayments will be rising. Similarly, if you hold multiple forms of debt, each with a corresponding repayment date and amount, you may find the administrative labour mounting. That time and energy could instead be poured into your family or your business — not to mention the additional repayments which could be directed to repaying your capital, (not the rising interest costs).

Performing a debt consolidation using a home equity loan can not only buy back time for your family or your business, but you could potentially also save money, as home equity loans come with lower interest rates than other forms of finance, especially unsecured debt. (Not to mention the saving on multiple sets of administration fees).

Inject funds into your business’ working capital

We probably don’t need to spruik the benefits of boosting your business’ working capital, however, by leveraging the equity in your home, you can open up business opportunities that were previously out of reach!

Renovate your home

Whether it’s the family home, your business premises or an investment property, accessing the funds to substantially improve your property can either mean a much-improved quality of life or the potential to increase your investment’s value further. Given the current hot rental market, improvements to an investment property can reap the rewards in terms of income yield.

Access funds even with a poor credit history

Most lenders require a good credit history to approve finance applications. Business owners who’ve been impacted by turbulent times and wear the battle scars on their credit file often find relief in private lending, as a healthy credit score isn’t necessary to support their application.

A private lender instead sets out to devise an appropriate exit strategy on how the home equity loan is to be repaid.

Access a larger loan amount

As a home equity loan offers you access of up to 80% of the available equity in your home, and an unsecured personal loan generally comes with a maximum loan amount of $50,000, the chances are that you can access a considerably larger loan amount through home equity loans than other forms of personal finance.

Lower interest rates than personal finance options

With so much media attention to the RBA raising the cash target rate, many borrowers understandably want to access the lowest interest rates available. Home equity loans tend to come with lower interest rates than other forms of personal finance, which is an advantage in the current interest rate environment.

Some of the potential disadvantages of home equity loans

Your home is offered as security

Your home, often the family home, is put up against collateral which means you could potentially risk losing the home if you default on the loan.

Unable to utilise your equity for other purposes

Using your equity to support a home equity loan means that you can’t use those funds for other purposes such as home renovations, holidays, property investment or as a rainy day fund.

Closing costs

If you do borrow money through a home equity loan to pay out other, smaller loans, you may need to pay closing costs with the existing lender or financial institution.

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Access over 200 of Australia’s top private lenders for home equity loans

Did you know that in Australia, over 25% of loans are provided by private lenders? At DFS, we have access to over 200 of Australia’s best private lenders to ensure that you access the best finance solution for your needs and unique situation.

Borrowing money as a business owner doesn’t need to be a chore. Let the team at Diverse Funding Solutions talk with you today about your options. We provide fast, hassle-free applications with funding in as little as 48 hours!

Home Equity Loan FAQs

Who can get a home equity loan?

A home equity loan through Diverse Funding Solutions is available to Aussie business owners who own an existing property.

What interest rate will I pay on a home equity loan?

Similar to other forms of finance, the final interest rate depends on several factors that aren’t known until you have submitted an application. However, rest assured that we access some of the most competitive interest rates in the private lending market.

Is a cash-out refinance on my existing mortgage better than a home equity loan?

Your unique financial circumstances will determine what’s best for your lending needs. However, it’s important to remember that most mortgages with fixed interest rates may have been fixed prior to the RBA’s increases to the cash target rate. What this means is that you could throw away an attractive fixed interest rate and lock in an updated, higher fixed interest rate by refinancing.

A variable interest rate mortgage could be another option, however, this is subject to move with subsequent rate increases, which could drastically impact your monthly mortgage payment.

What will my loan term on a home equity loan be?

When you borrow money for a home equity loan through DFS, we can offer loan terms between 2 and 36 months. No one wants to pay interest for longer than they should. If your budget affords more than the monthly payment, we also won’t penalise you for repaying your home equity loan early (unlike some home loans)!

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