Equity Loans

Equity, in simple terms, is the difference between what you owe on the mortgage and the value of your home. An equity loan allows you to use this difference in your home’s value and what you owe on it as collateral security.

Equity loans are ideal for homeowners who want to:

• Renovate their home and increase its value.

• Purchase an investment property.

• Invest in shares or other financial assets.

• Refinance their mortgage and consolidate debts.

• Fund large expenses such as education or medical bills.

If you aim to build wealth, enhance your property, or handle financial obligations, an equity loan offers the versatility and resources to support your goals.

What Is An Equity Loan

An equity loan allows you to borrow against the difference between your home’s value and what you owe on your mortgage. Your home equity acts as security for the loan, giving you access to additional funds based on your property’s market value.

This type of loan is often used to access a lump sum or a revolving line of credit. Since your home is used as collateral, equity loans typically offer lower interest rates than unsecured loans.

How Do Equity Loans Work?

Equity loans let you borrow against the difference between your home’s value and your outstanding mortgage. This type of loan can be structured in two main ways:

1. Line of Credit: A flexible option where you can withdraw funds as needed, similar to a credit card, and pay interest only on the amount used.
2. Lump-sum Loan: A one-time loan in which you receive a fixed amount and make regular repayments over time.

Lenders determine the amount you can borrow based on your home’s market value, your remaining mortgage balance, income, credit history, and overall financial position. If the loan is for an investment property, lenders may also assess the property’s value and potential rental income.

Some lenders offer interest-only repayment periods, making it easier to manage short-term expenses, while others require principal-and-interest repayments immediately. Equity loans can be withdrawn in full or in stages, making them an effective option for home renovations, purchasing an investment property, or consolidating debts.

How To Calculate Equity

Wondering how much equity you have? Use this simple formula:

Equity = Property Value – Remaining Loan Balance

Example

• Property Value: $800,000

• Remaining Loan Balance: $400,000

• Equity: $400,000

Most lenders let you borrow up to 80% of your property’s value, which means in this case, you could access $240,000 ($640,000 – $400,000). Some lenders may offer higher limits, but anything above 80% usually requires Lenders Mortgage Insurance (LMI).

Enter your property’s value and remaining loan balance in the following calculator to see how much equity you could access.

Disclaimer: Our equity loan calculator is designed to give you an estimate and is best used as a guide only.

What Are The Pros And Cons Of An Equity Loan?

Pros

• You can access large amounts of funds: With property values often substantial, many homeowners have a high amount of equity to unlock. An equity loan can provide tens or hundreds of thousands of dollars, perfect for big projects like adding a granny flat, buying a rental property, or covering private-school fees.

• Rates are usually low: Secured by your home, these loans typically come with lower rates than unsecured personal loans or credit cards. With variable-rate mortgages common, equity loans often track competitive mortgage rates (about 5-6% as of early 2025), making them much more affordable than a 15-20% credit-card rate.

• You get flexible withdrawal options: You could choose a lump sum for a one-time cost (like a holiday home deposit) or a line of credit to draw funds as needed, ideal for ongoing expenses, like a multi-stage renovation. You can even link it to your mortgage offset account for seamless access.

• You may receive tax benefits: Interest may be tax-deductible if the funds go toward income-producing investments – such as buying shares, starting a small business, or purchasing a rental property. For instance, borrowing to invest in a unit that generates rental income could reduce your taxable income. (Confirm with an accountant or the ATO, as this doesn’t apply to personal expenses like holidays.)

• No need to sell your home: An equity loan lets you tap into cash without selling. You keep living in your home while using its value to fund your next step – a big plus if you’ve built up solid wealth in your property.

Cons

• Your debt increases: Borrowing adds to your financial commitments, which can feel heavy if you’re already managing a large mortgage (median loans exceed $600,000 in many areas). Extra repayments could strain your budget, especially with rising costs like energy bills or groceries.

• Your home is at risk: Defaulting puts your property in jeopardy, lenders can repossess it through foreclosure if you can’t repay. This risk heightens if interest rates rise or your income drops; for example, from job loss or RBA rate increases.

• Rates could fluctuate: Many equity loans, particularly lines of credit, feature rates that fluctuate with the cash rate. If rates go up, like they did in 2022-23 your repayments could increase. A $100,000 loan at 5% might cost $537 monthly in interest, but at 7%, that’s $665, and it could climb further, making budgeting tricky.

• You have to practise discipline: A line of credit’s ease can lead to overspending, think new cars or getaways. Without a solid plan, you might chip away at your home’s equity and face repayment stress down the line.

Who Can Qualify For An Equity Loan?

You may qualify for an equity loan if you:

• Own a property with substantial equity built up.

• Have a stable income and meet lender requirements.

• Have a good credit history.

• Want to use your equity for renovations, investments, or debt consolidation.

Lenders also assess your loan serviceability by reviewing your income, existing debts, and overall financial position. If your income is irregular or unstable, you may face stricter lending criteria.

Types Of Equity Loans

Equity loans come in various forms, each designed to suit different financial needs and repayment preferences. Here’s a detailed look at the main types:

Line-Of-Credit Loans

This is a flexible borrowing option that works like a reusable pool of funds. You’re approved for a maximum limit based on your home’s equity, and you can draw money as needed, whether that’s a little at a time for ongoing expenses or larger amounts for specific projects. Interest is charged only on what you use, not the full limit, which can save you money if you don’t tap it all. Repayments are typically variable, adjusting with the amount borrowed and prevailing rates.

Lump-Sum Equity Loans

With this type, you borrow a single, fixed amount based on your home’s equity and receive it all at once. Repayments are structured as regular installments (usually monthly) over a set term, often with a fixed interest rate, giving you predictable costs. This makes it a straightforward choice for one-off expenses, such as buying a car, funding a wedding, or making a big investment like a rental property deposit. Since the loan is secured by your home, rates tend to be lower than unsecured alternatives, but you’ll need a clear plan to manage the consistent payments alongside your existing mortgage.

Home Loan Top-Up

This involves increasing your existing mortgage to access your equity, essentially ‘topping up’ the original loan amount. It’s often processed through your current lender, which can streamline approval and keep everything under one roof. The interest rate is typically the same as your mortgage rate – handy if you’ve locked in a competitive one – and repayments are rolled into your regular mortgage schedule. This option suits those who prefer simplicity and already have a mortgage with favourable terms. However, it might extend your mortgage term, meaning you could be paying it off for longer, and additional fees (like valuation or application costs) might apply.

Interest-Only Equity Loans

Some lenders offer an interest-only repayment period on an equity loan, where you pay just the interest charges for an initial phase, say, 1 to 5 years, rather than reducing the principal. This keeps your short-term costs lower, freeing up cashflow for other priorities, like investing in shares or covering temporary income gaps. Once the interest-only term ends, payments switch to include principal, and the total loan term may stretch out, increasing the overall interest paid. It’s a strategic choice for borrowers confident in future income growth or planning to sell an asset later, but it demands careful planning to avoid a repayment shock down the track.