Equity Loan – The Monzi A to Z

An equity loan allows you to borrow against the equity in your home. Not sure what this all means? Monzi’s here to get to the bottom of it all. Please note, however, these loans are not available through our lender-finder service.

Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

What is an equity loan?

Home equity can simply be defined as the value of your home, minus any money you owe on your mortgage. Moreover, you can borrow against your home’s equity while continuing to live in it. These funds, in short, can be used to cover renovations, medical expenses or can even help with general living costs.

Generally, your loan is repaid when you sell your home.

Finally, consider the following:

If you have a property currently worth $500,000, and you owe $300,000 on your mortgage, you have around $200,000 worth of equity to borrow against.

How does an equity loan work?

In Australia, these loans often comes in two types: reverse mortgage and home reversion. Both of these loan types, however, function differently, so we’ll explore these options below.

What is a reverse mortgage?

With a reverse mortgage, you use the equity in your home as security against what you borrow. Additionally, the minimum amount you can borrow may vary between lenders, but it is generally around $10,000.

According to the MoneySmart website, the most you can borrow is likely to be 15% to 20% of the value of your home if you’re aged over 60. Moreover, as a general rule, add 1% for every year past 60. This is worth noting, especially if you are looking for home equity finance for seniors.

You can receive your funds as:

  • regular stream of income;
  • line of credit;
  • one lump sum deposited into your account; or
  • a combination of the above.

Bear in mind, your age may affect how you can access your reverse mortgage funds.

How does a reverse mortgage work?

When you borrow money against the equity in your home, interest compounds. In other words, the interest grows and is added to what you borrow.

Therefore, when you sell your home, you repay the loan in full, including all the interest and added fees.

Finally, a number of factors determine the total cost of your loan, including:

  • the amount you borrow
  • how you receive your loan (a lump some will cost more due to interest)
  • rates and fees (upfront, ongoing, etc.)
  • the loan term.

Can I pull equity out of my house?

Yes! Through a home reversion. We will, in short, explore these below.

Equity loan – home reversion

Home reversion functions differently to a reverse mortgage. Specifically, a home reversion lets you sell a part of the future value of your property. Finally, once the loan is complete, you get a lump sum payment and keep the remainder of your equity balance.

How does home reversion work?

Whoever provides your home reversion will pay you a reduced amount of the value of the share you sell. Moreover, while this depends on your age, you may be able to expect 25% or more of the current value of the share.

This may be, understandably, confusing to some people. We have, as a result, included an example taken from the MoneySmart website to make everything a bit clearer.

To begin, let’s say your home is worth $400,000 and you decide to sell a 25% share of the future value, which is $100,000. The provider, therefore, may only offer you between $25,000 and $40,000 for the share.

Moreover, when you sell your property, you sell the provider the 25% share of the sale price. Let’s say you go on to sell your home for $800,000, the provider will receive $200,000.

Finally, keep in mind that home reversion is technically not a loan. As a result, you do not pay interest. You will, however, pay fees for the transaction and evaluation of your property.

Are equity loans a good idea?

A loan may be a good idea in certain situations. Ultimately, whether or not it is a good idea will depend on your situation and objectives.

You should, as a result, consider the below pros and cons before making a decision.

Home equity – reverse mortgage pros & cons

Pros

  • You continue to reside in your house as the owner.
  • A regular income stream may help supplement your income in retirement.
  • You could use a lump sum to cover renovations.
  • May be able to free up money during an emergency.

Cons

  • Debt grows and equity shrinks over time.
  • Compounding interest and fees may significantly increase your loan balance.
  • Interest may be high.
  • May affect your ability to afford living expenses in the future.

Home equity loan – home reversion pros and cons

Pros

  • Sell a share of the home’s future value and still get to live in it.
  • May be able to pay for renovations or maintenance.
  • Free up money during an emergency.

Cons

  • You lose a share of your home’s equity.
  • It can often be difficult understand how the process works.
  • Reduced level of flexibility if your situation changes.

For more information head to MoneySmart.

Equity loan key in wooden door

What can I spend my money on?

You are afforded a lot of flexibility when it comes to an equity loan. However, common uses for these loans include:

  • Renovations. Are there any home improvement plans in the pipeline? You could use the equity in your home to cover the cost of labour, materials, planning etc.
  • Investing. You could use your funds as a down payment on an investment property, or even to buy stocks.
  • Consolidation. Consolidate your debts using the equity in your home.
  • Personal expenses. You could even buy a new car, plan a family holiday or put into your business.

Where can I find financial advice?

While Monzi does not offer financial advice, we recommend seeking professional advice before making important financial decisions. Moreover, a good financial adviser will quickly gain an understanding of your financial situation, as well as your needs and objectives.

Before you make a decision on a financial adviser, consider the following:

  • Confirm they are fully licensed to provide advice. You can check their credentials on the Financial Advisers Register.
  • Consider what you need advice on; investing, general budgeting or retirement planning?
  • Like any purchase, compare different advisers to ensure you’re getting a better deal.
  • Be wary of providing too much access to your investment accounts.
  • Be honest and let your adviser know if you’re unhappy with their service.

Can Monzi offer me an equity loan?

No, Monzi’s lender-finder service cannot offer you a loan secured by your home equity. Instead, we aim to match your application with a lender offering personal finance.

The loans our network of lenders are potentially able to offer are:

LoanAmountRepayment terms
Small personal loans$300 to $2,000Up to 12 months
Medium personal loans$2,001 to $4,60013 to 24 months
Large personal loans$5,000 to $10,00013 to 24 months

Monzi Personal Loans

Admittedly, while we may not be able to help with an equity loan, our lender-finder service may be able to match you with a lender offering personal loans. Moreover, lenders may be able to offer between $300 to $10,000. Repayment terms, in short, vary between lenders.

In addition, if you’re concerned your credit history isn’t what it used to be, consider Monzi. After all, we work with a panel of lenders willing to consider consumers with poor credit. We can, as a result, help consumers with a range of credit profiles.

Finally, consumers applying within our normal hours may receive an outcome within 60 minutes.

Factor In

Costs

Two credit cards
Two credit cards

You won't use a penny to apply for our lender-finding service, but here's some costs you could expect from a lender

Loan amount

$300 - $2,000

Terms

12 months

Costs

20% upfront establishment fee

+ 4% monthly fee

Example

Loan Amount of $1,000 over 6 months repayable weekly (25 weekly repayments). $1,000 (Principal Amount) + $200 (20% Establishment Fee) + $240 (fees based on 4% per month over 25 weeks) = $1,440 total repayable in 25 weekly installments of $57.60.

Under the current legislation, most small personal loan providers don’t charge an annual interest rate (you’ll know this as an APR) %. The maximum you will be charged is a flat 20% Establishment Fee and a flat 4% Monthly Fee. The maximum comparison rate on loans between $300 and $2000 is 199.43%. This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate

Loan amount

$2,001 - $4,600

Terms

13 months

24 months

Costs

48% annual percantage rate

67.41% comparison rate p.a.

Example

Loan Amount of $3,000 over 18 months repayable weekly (78 weekly repayments). $3,000 (Principle Amount) + $400 (Establishment Fee) + $1,379.06 (reducing interest) = $4,779.06 total repayable over 18 months with weekly installments of $61.27.

The Interest Rate for Secured Medium Loans is 48%. The Typical Comparison Rate is 67.41% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.

Loan amount

$5,000 - $10,000

Terms

13 months

24 months

Costs

21.24% annual percantage rate

48% comparison rate p.a.

Example

Loan Amount of $10,000 over 24 months repayable weekly (104 weekly repayments). $10,000 (Principle Amount) + $5,577.12 (Interest) = $15,577.12 total repayable over 24 months with weekly installments of $149.78.

The Interest Rate for Secured Large Amount Loans is 48%. Maximum Comparison Rate is 48% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.