Can I use my house as collateral for a loan?
Buying a property with a mortgage usually means using the value of the property to secure the loan; a practice called “mortgaging” your home. But it’s also possible to use the value of your property as collateral for another loan, provided you meet the eligibility criteria and have enough usable equity.
What is a guarantee or guarantee on a loan?
When a bank or similar financial institution lends you money, it takes the risk that you will not repay it. The higher a lender considers this risk, the more interest and fees they can charge on the loan.
To help reduce the lender’s risk (as well as the cost of your own loan repayments), you can offer the lender a guarantee or security for the loan. This is a valuable asset that the lender can legally repossess and sell if you default, to help them get their money back.
Most home loans are secured by the value of the property purchased. Many car loans are also guaranteed by the value of the car you buy. For certain credit products such as personal loans, it is possible to use a separate asset as collateral to reduce your interest costs. It could be a cash in a a term deposit, assets such as stocks, valuables such as jewelry or works of art, or the value of a car or the equity in a property.
What is Equity?
Equity is the name of the percentage of your home that you own and for which no mortgage is due. A quick way to find equity is to use this formula:
Current value of your property – Remaining balance of mortgage principal = Equity
Making additional payments on your mortgage can help you quickly reduce your mortgage principal and increase your available capital. Also, if the value of your property has increased since you first bought it, you may find that you have more equity than expected after the appraisal.
Keep in mind that not all of your home equity can be used as collateral, as part of it will be needed to secure your current mortgage. If more than 80% of your property’s value is used to secure financing, your lender will likely purchase a Lender’s Mortgage Insurance (LMI) policy, which you, the borrower, will probably have to pay for.
You can find your usable capital using this formula:
80% of the current value of your property – Remaining balance of mortgage principal = Usable equity
For example, if your property is worth $500,000 and your mortgage has an outstanding balance of $300,000, you have $200,000 in equity. But since 80% of the property’s value is $400,000, that leaves only $100,000 of equity available to serve as collateral on other loans.
How can you use equity?
You can use the equity in a property as collateral or collateral on a new loan. You may be able to apply for a mortgage on an investment property, using the equity in your current property instead of a traditional deposit.
When considering buying an investment property using your capital, a common benchmark is to look at properties with a purchase price around four times your usable capital. For example, if you had $100,000 of usable equity, reviewing properties priced around $400,000 can allow your capital to cover a down payment on the property, as well as upfront costs such as fees and stamp duty.
You can also apply for a line of credit with a maximum limit based on your equity, which works much like a credit card. In one home equity loan this way, you would only pay interest on the amount you borrowed and you would have some flexibility in your repayments. This flexible access to money could help you manage the costs of renovating your property, or going on vacation, or investing in assets such as stocks.
Keep in mind that borrowing money is always a risk, which could affect your financial future. Before building your capital, consider seeking independent financial advice and/or contact a mortgage broker.