Home equity loans: What is it and should you use it?


When looking to start your own business, the costs seems enormous.

There's the stock, the staff, the rent, the produce, the furniture, the marketing, and of course, the equipment. In fact, the costs can seem so overwhelming that prospective business owners will do just about anything to get themselves off the ground.

One mistake that a lot of people make is deciding to take out a home equity loan.

A home equity loan, in simple terms, is a borrowed amount that is the difference between the market value of your home, and the total cost of your mortgage. Think of it as skimming the cream off the top and claiming your home's sale earnings before it's sold.

It seems like a great idea, and to be sure, not many traditional lenders will tell you otherwise. But in reality, taking out a home equity loan is fraught with danger: you are essentially gambling your home.

There are three major issues with a home equity loan. Firstly, the loan is secured against your home. In other words, if you can't make your repayments, the lender can take your home. To offset this danger, you'll find that the interest rates on a home equity loan at the moment are temptingly low - but don't take the bait.

Secondly, adding debt to your mortgage seems really easy - but it will add up. While this might be OK while house prices are rising and interest rates remain low, if the former falls and the latter rises, you could end up with negative equity - a mortgage that is higher than the house's value.

Lastly, increasing your loan usually leads to the bank hitting you with a higher interest rate due to you having less equity in the property. This is called loan-to-value ratio.

Financial expert David Rankin warns against the 'quick fix' solution of a home equity loan.

"Home equity loans are like credit cards," he says. "If you are not disciplined, it's probably best to give them a wide berth, because there is no built-in mechanism to pay off the debt." And trust us when we say that the banks are ruthless when it comes to reclaiming debt - even if it means taking your family home.

Silver Chef, on the other hand, is here to help you without the danger. Like a home equity loan, you will have your equipment financed immediately. Unlike a home equity loan, you don't have to promise us your house! There's no large capital outlay, and the weekly rent is affordable. Should the worst case come to fruition, you can hand the equipment back to Silver Chef at the end of 12 months, no questions asked. What's more, your rental payments are 100% tax deductable.  

Read the interviews with:

David Rankin
Former bank manager and small business specialist, David now runs the personal budgeting service 'Sort My Money'.

Tracey Bakon
Tracey is the owner of 'The Organic Pantry' in Townsville, Queensland, and is also a proud Silver Chef customer.

Damien Guivarra 
Damien is the Chief Operating Officer of Silver Chef Group. Over the last ten years Damien has played an integral role in the growth of the company, holding a variety of sales focused and operational management roles.

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