What are some home equity loan alternatives?

Need cash fast but aren’t keen to take out an additional loan to dip into the equity you’ve paid into your mortgage? There are alternative options out there if you know where to look, some of which may charge little to no interest.

One popular option you may have come across is a home equity loan. This involves a borrower with an existing mortgage who has paid equity into the loan to take out an additional loan secured by said equity.

For example, if a borrower has a house now worth $1 million and $600,000 outstanding on their mortgage, then they have an equity value of $400,000. A home equity loan may allow you to access your usable equity as a loan. Your usable equity is typically 80% of your home value minus your remaining mortgage – in this case, 80% of $1 million is $800,000, minus your $600,000 mortgage, leaves you with $200,000 in usable equity. Some borrowers may use these funds for renovations to further boost the value of their property, so that they then in turn increase their equity.

Whether you’ve been hit with an unexpected repair bill or are hoping to take the family on a holiday, there are a range of reasons why someone may need to access cash. And not every borrower will want to consider a home equity loan.

Let’s explore some of the alternatives that may be available for mortgage holders looking to access funds:

• Offset account and redraw facility

If your home loan offers features like an offset account or a redraw facility, an alternative to a home equity loan may be to just withdraw some of these funds.

With an offset account, if you’ve been making payments into the account, you should be able to withdraw some or all without penalty as you need. With a redraw facility, if you’ve been making extra repayments into your home loan, you may be able to withdraw some, or all, of these funds. Some providers may charge a fee for accessing funds in the redraw facility, so double check this before you proceed.

The benefit of using these features instead of taking out a home equity loan is that you’re able to access funds without taking on additional debt. However, by doing so you may again increase the amount owing on your loan and see your regular mortgage repayments increase, as well as the amount of interest you may pay over the life of the loan.

• Refinance to access equity

One of the many reasons homeowners may consider refinancing is to access the equity in their mortgage. If you’re hoping to avoid a home equity loan, you may want to consider refinancing your mortgage to unlock the equity in it.

When you refinance your mortgage to a new provider you may want to negotiate increasing the loan amount. For example, the hypothetical borrower with a $600,000 mortgage but $400,000 in equity may refinance to a new lender but choose to increase the mortgage to $650,000. The lender may choose to allow this as they know the borrower has enough equity in their property to service this additional $50,000 if the worst occurred and they defaulted on the loan.

Ideally, you would also refinance to a lower rate lender or one that charges lower fees. This is because by adding to your loan amount you’ll understandably increase your ongoing mortgage repayments and the total interest paid over the life of the loan. It may be better for your finances if you balance out the new higher loan amount with a lower interest rate, for example.

• 0% purchase credit card

Another alternative to taking out a home equity loan may be to instead consider another credit product altogether. If you’re looking to access cash but want to avoid paying interest as much as possible, you may want to consider the benefits of a 0% purchase credit card.

This type of credit card allows borrowers to access credit and avoid interest charges for a set period - typically a few months but up to two years for some card issuers. And unlike a home equity loan or using an offset account or redraw, you won’t be charged additional interest for the interest-free period.

Keep in mind that once the interest-free period ends, your credit card will revert to a higher-than-average interest rate. The balance owing on your account will start to accrue interest. Credit cards typically have much higher interest rates than home loans or personal loans, so if you’re considering this option you’ll want to ensure:

1. You’ve set a budget that means the purchase you make is repaid within the interest-free period and,
2. You’re aware of exactly how long before the interest-free period ends.

There are a range of ways mortgage holders can access funds when needed, whether through their existing mortgage or by considering alternative products. Whatever option you choose, be sure to compare all the interest rates, fees, features and any other factors before making your final decision. Taking on additional debt, no matter the method, may hurt your finances if not managed responsibly.

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