A guide to paying off your home equity loan

Accessing the equity in your home can provide extra financial flexibility, which can be useful for managing major purchases and household expenses. But how will you go paying down your loan until your debt is cleared?

What is a home equity loan? 

You can find the equity in your home by taking its current value (including any capital gains or losses since your purchase) and subtracting your remaining mortgage principal. Part of this equity can be used as security or collateral when you apply to borrow money.

You may be able to borrow a lump sum with a home equity loan that’s separate to your current mortgage. Similarly to a personal loan, you’ll make regular repayments until the lump sum is repaid plus interest.

Alternatively, your home equity loan could be a line of credit that functions similarly to a credit card. You’ll be able to borrow up to a maximum credit limit, choose when you make repayments and how much you’ll repay, and only be charged interest on what you’ve borrowed, rather than the maximum limit.

Another option for accessing your home equity is to refinance and “top up” your current mortgage by borrowing more money. This means that your home equity loan’s repayments will be managed as part of the rest of your mortgage.

Retired Australians who own their home outright may also be able to access the equity in their property as an income stream through a reverse mortgage.

How do you pay off a home equity loan? 

Your options for quickly paying off a home equity loan may depend on the type of loan structure you’ve chosen.

If you’ve rolled your home equity loan in with your mortgage, then most methods for paying off a home loan faster may apply. These could include: 

• refinancing to a lower interest rate but keeping the same repayments
• making extra repayments
• saving money in an offset account

Adding a home equity loan to your mortgage may mean your home loan takes longer to repay, costing you more in interest charges over time. But if you can keep on top of your principal and interest repayments and make enough extra repayments, you may be able to minimise these extra costs over the long term.

Repaying a separate home equity loan may be a lot like paying off a personal loan – keep making repayments and you’ll eventually clear the debt. If your lender allows it, you may be able to make extra repayments to pay it off sooner, though sometimes fees may apply.

A line of credit can be repaid much like a credit card. There is no standard loan term, and depending on the lender, you may only need to make a small minimum repayment, or just cover the interest charges. Some lenders will allow you to capitalise the interest charges on the line of credit into the loan, until you reach your maximum limit. But the faster you can repay what you owe, the less interest you may be charged.

A reverse mortgage also doesn’t need to be repaid in regular instalments. While you’re living in your home, you likely won’t be required to make repayments, though you can if you choose to. However, when you sell your house, move into aged care, or pass away, the loan and its interest charges and fees will need to be repaid, either by you or the executor of your estate.

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