Home Equity Loan vs Home Equity Line of Credit
Did you know that approximately 25% of senior New Zealand households have low retirement income and savings, but high levels of equity in their homes? In fact, the same study from Motu Research and Te Ara Ahunga Retirement Commission show that these households have about $600,000 in equity.
That’s more than half a million in value, sitting on their walls and roof, untouched.
Or does it have to be?
That’s where home equity release products like home equity line of credit (HELOC) and home equity loan may come in.
This article will show you everything you need to know about the different home loan types in New Zealand—from how they work and how much you can borrow to their pros and cons, and differences.
Stick around and we’ll show you how to make an informed choice about leveraging your home’s equity.
What is Home Equity and What is a Home Equity Loan?
As a homeowner, you build equity in two ways: by paying down your mortgage balance and when the market value of your home increases. This equity is the portion of your home that you truly “own.”
A home equity loan allows you to borrow money using the value you’ve built up in your home.
Sounds straightforward, right? Well, there’s more to it than meets the eye.
Each home equity loan has 5 characteristics:
- Collateral-based: Your home’s equity serves as collateral for the loan
- Fixed-rate option: Unlike HELOCs with variable rates, home equity loans typically offer fixed interest rates
- Lump-sum payment: You receive the entire loan amount upfront
- Second mortgage: Often called a second mortgage because it’s another loan against your property
- Pre-set payments: Home equity loans provide a regular payment structure of a fixed amount every month.
How Home Equity Loans Work
So how do lenders determine how much you can borrow? Most of them use what’s called a combined loan-to-value (CLTV) ratio, which allows you to borrow up to 80% of your home’s appraised value, less what you owe on the mortgage.
Let’s say your home is worth $600,000, and you have $350,000 remaining on the mortgage. Here’s how the CLTV calculation would work:
- Maximum CLTV at 80%: $600,000 × 0.80 = $480,000
- Current primary mortgage: $350,000
- Your maximum equity to use: $480,000 – $350,000 = $130,000
In this scenario, you could potentially borrow up to $130,000 through a home equity loan. But again, this is only 1 factor. Your credit report, gross monthly income, and payment history will significantly impact both the loan amount you qualify for and the interest rate you’ll be offered.
Pros and Cons of Obtaining a Home Equity Loan
Does taking out a loan sound good right about now? Read about the pros and cons of a new home equity loan first.
The Upsides
Since home equity loans aren’t tied up to a specific use, many property owners use the equity for home renovations, daily expenses, or medical emergencies. You can even use the equity to buy an investment property.
Here are other ways a new loan via home equity is a good choice:
- Easier to qualify because the loans are secured by your property as collateral
- Lower interest rates compared to other consumer type of loan like credit card debt
- Longer repayment terms (often 10-15 years or more), resulting in lower monthly payments
- Fixed interest rates so you pay the same amount when you repay the loan
The Downsides
Use home equity carefully, as it comes with serious risks. Understanding the risks is crucial before putting your home on the line.
- Lose your home to foreclosure if you default on the loan payments
- Additional loan to pay alongside your primary mortgage
- Mandatory full repayment when selling your home
- Closing costs as this is a 2nd mortgage, it will have closing costs similar to traditional mortgages
- Potential for “reloading,” a term used when people pay back the loan, but then borrow again as soon as possible
- Possible higher fees for home equity loans exceeding the appraised value
Remember that while these loans offer powerful financial leverage, they also place your most valuable asset—your home—on the line. Weigh these pros and cons, and honestly assess your financial situation, so you can determine whether using your home equity is the right move.
Home Equity Loan FAQs
Still not sure if you qualify for a home equity release? Do you have questions about using your home as collateral to borrow money? Read the questions below or send us your questions.
Is a home equity loan the same as refinancing?
No, these are two different financial products. Refinancing involves replacing your existing mortgage with a new one, potentially changing your interest rate, loan term, or borrowed amount. This means you’ll still have just one mortgage payment after refinancing.
A home equity loan, on the other hand, is a separate, additional loan secured by the equity in your property. It leaves your original mortgage untouched, which means you’ll be managing two separate payments. This is why home equity loans are sometimes called “second mortgages.”
It’s also not a reverse mortgage.
Does a home equity loan affect my mortgage?
Your original mortgage will continue with the same interest rate, payment schedule, and balance as before. You just have two loans, the primary mortgage, and the home equity loan.
The additional payment obligation from the equity loan will increase your debt-to-income ratio. If you want another loan in the future, don’t use up all the equity you’ve built.
Do home equity loans require a down payment?
No, home equity loans typically do not require a down payment because they are secured by the amount of equity in your property. This is the equity you’ve already built up by making payments on your primary mortgage or through the appreciation in your home’s value.
Do home equity loans hurt your credit?
Your credit score may drop slightly. This temporary drop happens because you’ve taken on new debt and because the credit inquiry necessary for loan approval can have a minor negative impact.
This negative effect is typically short-lived. In fact, your credit score may increase after you take out a home equity product since your total available credit went up.
The key to ensuring a positive long-term impact on your credit is making payments on time and managing your debt responsibly.
Should I use a home equity loan for debt consolidation?
Yes, equity loans can be used for debt consolidation. It sounds good in theory, because it has a lower interest than a credit card. It’s not always that simple though, so carefully compare the numbers with your provider.
Make sure that:
- The new monthly payment will be lower than your combined current payments
- You understand the total cost over the term of the loan
- You’ve factored in closing costs and fees
- You have a plan to avoid accumulating new debt
Remember that even with lower interest rates, longer repayment terms could mean paying more interest over time.
Additionally, you’re converting unsecured debts (like credit cards) into debt secured by your home, which leads to greater risk if you struggle with payments in the future.
Read more: Smart Strategies for Reducing Debt on Loans
What is a HELOC Loan?
Home equity line of credit (HELOC) or home equity financing functions like a credit card. You can get money from it as needed, then repay it and draw from it again, during a predetermined term by the lender.
A HELOC has variable rates. It means your interest rates may increase or decrease as the market does, making it difficult to estimate how much you’ll have to pay in the end.
The amount you’ll be able to borrow will also be based on the equity built in your home, your credit history, and monthly income.
How does a HELOC differ from a Home Equity Loan?
A home equity loan gives you money in one lump sum, whereas a HELOC gives you a revolving line of credit that you can draw on multiple times for a set number of years (e.g. 10 years). Much like a credit card, you pay interest daily based on what you owe.
For instance, you can borrow $25,000 on a home equity line of credit for $100,000. Since you only borrowed $25,000, you’ll only be billed interest on that amount and not the whole $100,000.
Both an equity loan or a HELOC poses the same downsides, like the possibility of having negative equity, where you owe more than the value of your home. When that happens and you can’t pay, you may lose your home.
Want to Use the Equity in Your Home?
Ready to see how much home equity you can access? Contact our team for a consultation tailored to your needs.
- HELOC and a home equity loan gives you different ways to access the equity in your home with lower interest rates than most personal loans or credit cards.
- Consider both the benefits (easier qualification, flexible usage) and risks like the possibility to foreclose on your home before applying for a home equity product.
You can also check our loan calculator to know exactly how much you can borrow.
by Ash Horton
April 22, 2025
Ash is a professional content writer with extensive experience in business development in the financial services. Ash has founded businesses from the age of 19, including franchising ventures, and working alongside some of the largest retailers in the world.
