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Can you get a home equity loan with low income?
There are many reasons why you may be seeking a home equity loan, such as purchasing another property or paying for a holiday, wedding or medical expenses. You can also use a home equity loan to renovate your house/unit or to ease the pressure on your monthly budget by consolidating some of your ongoing debts, such as credit cards or personal loans.
However, if a lender determines that your income isn't adequate to service the increased repayments on your home loan you might find it challenging to qualify for a home equity loan.
Why do lenders check your income for an equity home loan?
A home equity loan allows you to increase your borrowing capacity to take advantage of the equity you have accrued. When you use your equity to borrow more money, you increase the debt and interest owed to your lender.
As Australian financial institutions are required to practise responsible lending, it falls upon them to reasonably ensure that you are fit and able to service this higher mortgage debt without falling into financial hardship before approving a home equity loan.
By asking you for information on your income and ongoing liabilities, a lender can calculate your debt-to-income (DTI) ratio, which helps them understand how much of your income is going towards servicing your debts. If this ratio is high, the lender may determine that you won’t have much left to meet your day-to-day expenses, or that your financial situation is risky, potentially leading them to reject your mortgage application or limit the amount you can borrow against your home equity.
Calculating your debt-to-income ratio is simple: divide your total liabilities (including your increased loan repayments) by your annual gross income . Naturally, if your income is low, your DTI will be high compared to someone with the same level of debt as you, but earning a higher income. A low income could thus make it difficult for you to qualify for a home equity loan if the increased borrowing pushes your DTI to a risky level.
Generally, a DTI ratio that’s over six is considered risky, as lenders may speculate that you’ll experience mortgage stress if your financial situation were to suddenly change or if interest rates rose significantly. In this case, a lender might not allow you to borrow against your equity or restrict the amount you can borrow to keep your DTI below six.
Tips for reducing your debt-to-income ratio
If your annual income is low, but you think you’ll have enough cash to service a higher mortgage repayment each month, you may be able to find ways to work towards reducing your DTI ratio to qualify for a home equity loan.
Source additional income streams
There are a variety of different ways to add more money to your bottom line. You might consider working an extra shift or taking up an additional job or side hustle to raise your income. Another option is to sell unnecessary possessions on the web. You could also embrace the sharing economy by renting out a spare room, storage space or an unused vehicle or bike. You may also want to tutor students or monetise your blog or social media accounts.
Seeking other ideas? Discover 14 fun and exciting ways to boost your income, while also increasing creative output.
Assess your household budget
You might consider creating or amending your household budget to control unnecessary spending and try to reduce other debts to increase your chances of approval. Set your goals, gather your financial information, determine your income and expenses and figure out what needs to change in order to make improvements. Then, keep it up!
Evaluate your borrowing capabilities
It could also be helpful to check your borrowing capacity using RateCity’s Borrowing Power Calculator to find out the maximum amount you might be able to borrow with your current income. If this amount is more than what you currently owe on your home, it might be possible for you to qualify for a home equity loan. However, it's advisable to calculate your monthly repayments for the increased amount to check whether you'll be able to repay the loan comfortably over time.
Taking a loan on your home's equity means increasing how much you owe your lender. Keep in mind that larger monthly payments could strain your budget and lead to a longer repayment period if you refinance to reduce your monthly repayment amounts.
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Product database updated 22 Sep, 2024
