The good, the bad and the ugly of dipping into home equity: Patrick Nolan

The good, the bad and the ugly of dipping into home equity: Patrick Nolan
The good, the bad and the ugly of dipping into home equity: Patrick Nolan

GUEST OBSERVER

If you’ve owned your home for a number of years, it’s likely you’ve racked up some impressive gains in home equity – that’s the difference between the property’s market value and the balance of your home loan.

This means there’s a whole stash of cash just waiting to be tapped into either through a home loan refinance or a loan top up. While it’s tempting to spend up big, treating your home as an ATM isn’t healthy. We share some smart, sensible, and downright frivolous ways to use your home equity.

Smart moves

Use equity to renovate your existing home – Quality home improvements can add to your lifestyle; save on the cost and hassle of relocating to a new home, and best of all the renovations can increase the market value of your home.

Invest in a rental property – Using your home to grow wealth? Now that’s a smart move. Tapping into equity may even mean you don’t need to save for a cash deposit.

Sensible – with strings attached

Consolidating personal debt – If you’re juggling a few credit cards, a personal loan and maybe a car loan, consolidating the lot into your home loan can streamline your finances. It means just one monthly repayment to manage, and as home loans usually have a lower rate, you’ll save on interest costs.

But – and it’s a big but – you could be turning short term debts into a long term debt and end up paying more than necessary in long term interest. Use the savings on monthly repayments to make extra home loan repayments and keep a lid on interest costs while you whittle away the loan.

ME’s 10th biannual Household Financial Comfort Report shows that more households ‘paying off or owning a home’ reported to be drawing on their home equity to ‘pay off debt’ and ‘to make ends meet’ during the first half of 2016.

Think twice 

Here today, gone tomorrow purchases – using home equity to fund a round the world vacation, a new designer wardrobe, or any purchase with no real lasting value calls for some serious soul searching. Not only will you be whittling away precious equity, you are adding the cost of long term interest to the purchases.  

The time may come when you really need that equity for must-haves rather than luxuries. So think twice and weigh up other finance options like, say, a personal loan, which will allow you to pay off big ticket purchases buys in just a few years.

Patrick Nolan is head of home loans for industry super fund-owned bank ME. You can contact Patrick here. 

 

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Mortgage Rate Home Equity

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