It's a common conundrum for many Aussie homeowners. As a nation, we're wealthy compared to many of our OECD peers. However, much of our wealth is tied up in housing and superannuation, often leaving us lacking liquid cash.
That means that, when it comes time to take a holiday, renovate a home, buy a new car, or put down a deposit on an investment property, you might find yourself short, despite having plenty of assets.
Fortunately, there may be a way to get ahold of the money tied up in your property without selling your abode: you could consider refinancing to access equity.
It might be an attractive prospect, and refinancing can yield other financial benefits too, but it's important to understand what refinancing is, what equity unlocking refers to, and whether you've got enough equity in your home to bother.
What is refinancing?
Refinancing means to move your home loan from one product or lender to another.
Many home loan holders refinance to get a lower interest rate or a mortgage that's more suited to their needs.
Refinancing is often considered a complex process, but in reality the benefits can significantly outweigh the bother of filling out paperwork. After all, even a small reduction in the interest rate charged on home loan could save a borrower hundreds of dollars a month and tens of thousands over the life of their mortgage.
During the process of refinancing, your new lender will pay your original lender all the money you borrowed through your mortgage facility, and you'll start to make repayments to your new lender.
See also: Step-by-step guide to refinancing your home loan
What is equity and how much do you have?
In a nutshell, equity is the difference between the value of your property and the amount your owe on your home loan.
Let's say a person bought a $700,000 property and has a balance of $400,000 left owing on their mortgage. They would have $300,000 of equity.
How can refinancing allow you access to your equity?
But how does refinancing give you access to those funds? Well, you can organise with a lender (whether your current lender or a new lender) to simply borrow a larger amount.
For instance, the person with $300,000 of equity might choose to borrow an extra $150,000 for an extravagant holiday – leaving them with a principal balance of $550,000 on their home loan and just $150,000 of equity
That would also leave them with a loan-to-value ratio (LVR) of less than 80% (meaning they own 20% or more of their home outright) and wouldn't need to pay for Lenders Mortgage Insurance (LMI).
How to refinance a home loan in order to access equity
Refinancing in order to get access to equity locked away in your home is a similar process as refinancing for any other reason.
Perhaps the most crucial step when looking for an equity release is getting a valuation for your property.
You'll likely need to have up-to-date figures on the value of your home, particularly if you've owned it for a while. Its market worth may be significantly higher or lower now than it was when you purchased it.
Another key aspect to bear in mind if you're hoping to refinance to secure equity, is that most lenders don't allow people to borrow more than 90% or 95% of their property's value and if you're borrowing more than 80% of your property's value, you might need to pay for LMI. So, you likely won't be able to access the entire value of your property in cash by refinancing.
Looking to refinance to access your home equity? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.08% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 STAR CUSTOMER RATINGS |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Disclosure | |||||||||||
6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% |
Key considerations: What to ask yourself before refinancing for equity
Refinancing your mortgage to access equity is a big financial decision and you need to ask yourself and your lender (or mortgage broker, if you're turning to one) some important questions before setting your mind. Some include:
1. What do you want to do with the money tied up in your home?
Perhaps the crucial question is: will accessing your home equity indicate that you're living beyond your means?
Adding to your financial obligations for discretionary purposes should be carefully considered. You might feel that a European holiday or an extravagant wedding is essential, but such expenses are often wants rather than needs.
On the other hand, using the equity to finance the purchase of an investment property, a business opportunity, or a well thought out renovation could help grow your wealth over time.
There may also be situations where accessing your home equity is absolutely necessary, like if you needed cash to cover essential medical expenses.
2. Would you be better off borrowing the funds through another loan product?
Remember, any money you withdraw from your equity through refinancing will need to be repaid - with interest.
While home loan interest rates are generally lower than those on personal loans or credit cards, the longer term of a typical home loan means borrowing more against your mortgage might leave you worse off than if you had opted for a consumer debt product.
Example: Sarah and James need $50,000 to renovate
Sarah and James are planning a $50,000 home renovation and have two options to finance it:
-
Access their home equity
They have 20 years remaining on their home loan and an interest rate of 5% p.a. -
Take out a personal loan
They could access a personal loan with an interest rate of 8% p.a. and a loan term of five years.
Here's how each decision would play out over the longer term:
| Refinancing to access equity | Personal loan | |
|---|---|---|
| Amount borrowed | $50,000 | $50,000 |
| Interest rate (p.a.) | 5% | 8% |
| Loan term | 20 years | 5 years |
| Monthly repayment | Extra $330 (on top of existing repayments) | $1,014 |
| Total extra interest paid over loan term | $30,400 | $10,800 |
While Sarah and James might have to fork out more each month by going down the personal loan route, they'd ultimately be better off taking the short term financial hit rather than rolling the cost of their renovation into their home loan.
That is, unless they made additional repayments towards their home loan to make up for the extra borrowings.
3. Will accessing equity lead to increased financial risk?
Accessing your home equity by refinancing means increasing how much you owe.
Will you be able to afford the resulting higher repayments, particularly if interest rates were to increase too? What about if something unexpected were to occur, like a shock job loss?
Another factor worth considering is whether increasing your financial obligations aligns with your long term plans.
You might be hoping to retire in the near-enough future. Or, you might be considering growing your family, which may mean your household income could drop in the coming years.
Bolstering the size of your home loan now could lead to increased financial pressure down the line, or cause you to delay your exciting plans.
4. What are the costs associated with refinancing?
Understanding the cost of refinancing a home loan is potentially a smaller consideration than those listed above, but it's still worth contemplating.
Check out our guide on the cost of refinancing to learn how much you might need to hand over in order to access your equity.
Photo by Austin Distel on Unsplash
Collections: Refinance home loans Home improvement Home Loan Lender
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