What is an interest only home equity loan?

It’s possible to use any equity you’ve built up in your home to secure a loan or a line of credit to help pay for other household expenses. You may even be able to pay only the interest charged on these loans for a limited time, though you could risk paying more in total over the long run.

What is home equity?

The equity in your home is how much of your home you own outright, without a mortgage owing on it. You can quickly estimate your current equity in a property by finding its current value and subtracting the principal amount still owing on your mortgage.

Your equity can grow in two ways: When you make principal and interest mortgage repayments, and when your property experiences capital growth, such as when house prices in your area are going up. If you’ve been keeping up with your mortgage payments for a few years, you may find that you have more equity available in your property than you realise, especially if you’ve also been making extra repayments.

What is a home equity loan?

You may be able to use part of the equity in your home as security when applying to borrow money. Keep in mind that your lender likely won’t let you access your full equity, as you’ll likely be required to maintain a certain loan to value ratio (LVR) in your property, typically 80 per cent. So to find your usable equity, start by finding 80 per cent of your property’s current value, then subtract the principal amount still owing on your mortgage.

There are different financial products you may be able to apply for with the help of your usable equity:

• You could refinance your mortgage and borrow more money as a home loan top-up.
• You could apply for a personal loan that’s secured by your equity.
• You could apply for a line of credit that works similarly to a credit card with a limit based on your usable equity.

These options may suit different borrowers depending on their personal and financial circumstances and how they plan to use the money.

Do you need to pay interest on a home equity loan?

Depending on the type of loan, you may not always need to pay interest on the money you borrow from your home equity, though this could potentially cost you more over the long run.

Home equity lines of credit only charge interest on the money you’ve drawn down so far, rather than the full credit limit. You may be able to make interest-only payments or capitalise the interest charges into your line of credit, to be paid at a later date. Keep in mind that capitalising your interest charges like this could mean you’ll reach your maximum credit limit sooner, and you could end up paying more interest in total over the long term.   

Compare home loans in Australia