Thinking of renovating one of your properties, or perhaps investing in a new one to grow your portfolio? Considering the usable equity accumulated in your original property is a savvy way to help finance this venture.
A home equity loan is an excellent alternative to a personal loan, or even a line of credit because the interest rates are lower—and you can use the money for just about anything you wish.
Our specialists at The Mortgage Agency have broken down everything you need to know on how to draw equity out of your home.
What Is Home Equity?
Think of the portion of your property you own versus the amount you still owe and pay interest on. A home equity lender will calculate usable equity by deducting the remaining loan amount from the property’s current market value. Given the range of market fluctuations that can occur, the amount you have available for this particular cash-out refinance method may vary.
As a result, the more you pay off your home loan and reduce your mortgage balance, the more equity you’ll have in the property. And, if the value of the property increases, the usable equity will do the same.
Joan bought a house for $450,000 and paid a $100,000 deposit. Therefore, Joan has equity of $100,000 in the property.
Over the next few years, the property value increased to $600,000, and during that time, Joan repaid $150,000 on the loan.
Current value of your property – Outstanding home loan balance = Home equity
$600,000 – $200,000 = $400,000
Joan’s equity in her home increased to $400,000.
How Do You Take Out a Home Equity Loan?
If you’re eager to withdraw your home equity, here are the steps to follow.
Determine How Much Equity You Can Access
Unfortunately, lenders don’t allow access to the full amount of available equity. Instead, alongside their normal lending criteria, they look at your servicing capability when considering the amount you can access.
Therefore, lenders work out your accessible equity using 80% of the property’s market value.
Current value of your property (x80%) – Outstanding home loan balance = Home equity
So, as per Joan’s example:
$600,000 (x 80%) – $200,000
$480,000 – $200,000 = $280,000
As demonstrated above, Joan only has accessible equity of $280,000.
Review Different Equity Home Loan Options
At this point, it’s a good idea to employ the services of a mortgage broker and have them suggest the home loan options suitable to you.
A mortgage broker can check your existing loan in comparison to fees and features of other loans, as well as the available interest rates from your current lender and others in the market. If you refinance your existing mortgage to borrow an extra amount, it’s a good opportunity to get a better deal.
If you’ve set up a redraw facility on your existing home loan and have made additional repayments over the years, you can redraw that cash and use it however you’d like.
Additional Top Up
An additional Top up allows you to borrow money on top of your original mortgage, potentially at a different interest rate.
Calculate the Costs of Accessing Equity
Different fees and costs are involved depending on the financial product you choose and how much equity you’d like to access.
For example, drawing more than 80% of your property’s value will probably mean you’ll have to pay Lenders’ Mortgage Insurance (LMI). Changing to a different lender could also include fees on both sides, such as break fees or a new loan application fee.
Loan Application and Settlement
Once you’ve discussed your options with your mortgage broker, they’ll help you get the application process underway and guide you to settlement.
Why Use Home Equity Loans?
Tapping into the equity in your home is beneficial for various reasons, including:
- Low-cost with favourable interest rates
- A lump sum can be borrowed
- Fixed monthly payments.
More importantly, you can use the money for anything at all, such as:
Deposits for Property Investment
One of the most popular uses of equity is taking money out of an existing property to help fund a property investment. Doing so fast-tracks the deposit-saving process.
Home Improvements or Renovations
Home improvement projects are also a popular reason to draw from your home’s equity because they can add value to the property. Some people simply want to upgrade and modernise, but others need to renovate due to significant changes in their lives. For example, you may need an additional bedroom because another child is on the way, or perhaps your parents are moving in so you can take care of them.
Having equity in your property doesn’t mean it must stay in an investment property. Diversifying into a different asset class could also be a good idea. Some people invest the money from their home equity in the share market or consider a range of managed funds.
Some people would like to consolidate several other debts into single monthly principal and interest payments. This can be easier to manage and help them get on top of their finances.
The equity in your home is calculated by deducting your home loan’s outstanding amount from the current value of your home, based on market conditions.
Lenders work out your accessible equity by using only 80% of the property’s market value. You can then access that available equity by refinancing your home loan.
Other options include withdrawing from your redraw facility or taking an additional advance.
Accessing your equity is convenient and straightforward, and you can use the money for anything, such as wealth creation in buying an investment property, home renovations, or even debt consolidation.
Using a home equity loan is generally cheaper than taking out a personal loan or a credit card as the interest rates are more favourable.
If you’re interested in accessing your equity, contact one of our brokers from The Mortgage Agency today. We’ll assist with the entire process from application to settlement, and ensure you get the best deal to suit your personal circumstances and financial situation.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.