Can you combine your home equity loan into your mortgage?

If you hold equity in a property, you may be able to use it to access a loan or a line of credit to help you cover the cost of major expenses or household projects. You may be able to choose between managing your home equity loan separately or combining it with your existing mortgage, though there are pros and cons to each approach.

How does a home equity loan work? 

Your equity is how much of your property you own outright, and doesn’t have a mortgage owing on it. You can estimate your equity by taking the current value of your home (such as with the help of a free property report) and subtracting what’s left of your mortgage principal.

Your equity can increase as you make principal and interest repayments on your home loan, and when you make extra repayments that you don’t subsequently redraw. Your equity can also grow if property prices rise in your area and your home increases in value. But it’s also possible that the opposite could occur, which could leave you in negative equity.

Your usable equity is typically 80 per cent of your property value minus your remaining mortgage principal. This is so that your mortgage lender can maintain a Loan to Value Ratio (LVR) of 80 per cent or less and avoid requiring Lender’s Mortgage Insurance (LMI).

This usable equity can be used as security or collateral for borrowing money, whether you’re taking out a separate home equity loan to be repaid over time (similarly to a personal loan), or a line of credit where you can borrow and make flexible repayments as you choose (similarly to a credit card).

Adding a home equity loan to your mortgage 

Another option for using your home equity is to refinance your current mortgage and “top up” your home loan by borrowing extra money. This effectively combines the home equity loan with your regular mortgage, allowing you to benefit from its interest rate, regular repayments and other features and benefits.

That said, it’s worth remembering that refinancing your home loan may mean paying assorted fees and charges. Also, topping up your home loan by borrowing extra money means it will likely take longer to pay off your mortgage, meaning you may pay more interest on your property in total. This could end up costing you more over the long run than you may pay by opting for a shorter-term loan.

Refinancing your home loan and accessing your equity may also require a credit check, to help ensure that you can comfortably manage the larger loan amount. And while you can estimate the value of your home with a free property report or an appraisal from a real estate agent, a formal valuation may be required to accurately calculate the value of your property.

If you’re uncertain whether accessing a home equity loan will suit your financial situation, or if you’d like some assistance applying for the loan, a mortgage broker may be able to help.

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