As a homeowner with a mortgage, you’ve probably heard that your home has equity. You may have even been told that you can use that equity to your advantage.
But what is equity? How do you calculate how much equity you have in your current home? Can you refinance a home loan to access equity? And if so, what can those funds then be used for?
What is property equity? And how is equity calculated?
Equity is a basic equation that determines how much of the property you own. To work out how much equity you have in your property, start by determining the current market value (how much you could reasonably expect to sell it for). Then, deduct the balance that you still owe on your home loan. The remaining amount is how much equity you have. If the property market in your area has increased since you first purchased the property, or if you’ve been making additional mortgage repayments, then you may have built up a substantial amount of equity.
For example, you may have initially purchased your home for $350,000. Now, some years later, your mortgage balance is $200,000, but your property value has increased to $500,000. This means you now have $300,000 in equity.
Can you refinance a home loan to access equity?
Yes, it is possible to refinance your existing mortgage in order to access some of your equity. When this happens, you’re borrowing against your equity or using that equity as collateral for your new loan. This allows homeowners to refinance their mortgages and borrow against their existing property without having to produce a cash deposit.
If you’re refinancing to access equity, what can you use the funds for?
If you’re refinancing to access equity then you can use the funds for a range of purposes. The most common reasons Australian homeowners give for accessing equity include:
- Investment: The equity in an existing property can be used as a deposit when buying an investment property, shares, or a business.
- Renovation: Equity can be used to finance a renovation of the existing home, which can then increase the value of the property.
- New Vehicle: Rather than take out a vehicle loan (which often comes with a higher interest rate), equity can be used to purchase a new car.
- Personal Expenses: Equity can be used for a range of personal expenses, including travel or medical costs.
What rules apply when refinancing your home loan to access equity?
The specific details (including fees and charges) will largely depend on the lender and home loan product that you choose. However, most lenders will want to know what you plan to use the funds for and may reject your application if they don’t feel the expense is justified.
You should be able to borrow up to 80% of your property’s current equity. So, if you have $300,000 in equity, you could borrow $240,000. Some lenders will allow you to borrow more (up to 90%), but this will likely incur Lender’s Mortgage Insurance.
What else should you know about refinancing your home loan to access equity?
Before you decide to refinance your home loan to access equity, it’s important to fully assess your current financial circumstances and the various loan products available. This is why it’s a great idea to speak with a mortgage broker with experience in refinancing equity loans.
A mortgage broker can talk you through all the financial implications, give advice on which loan product would best suit your circumstances, and answer any questions you may still have about the pros and cons of refinancing to access equity. To find out more, contact Phil Verheijen and the experienced team at Professional Lending Solutions.