Home Equity Loan - Refinancing to Access Equity
One of the most popular reasons borrowers look to refinance an existing loan is because they’re looking to use the equity they have in their existing property to borrow money for a number of purposes.
The main purposes are;
- To renovate an existing property
- To access money to make an investment
- To consolidate debts.
- To access money for other purposes like a holiday or big purchase such as a car
What is equity?
Equity is the difference between the money you owe on your property and the value a lender thinks your property could sell for. As an example, if you had a loan balance of $500,000 and you had your property valued at $800,000 then you would have $300,000 of equity and a loan-to-value ratio (LVR) of 62.5%.
The value of your property: the most important step in refinancing with equity
If you are looking to refinance in order to access any existing equity in your property, the most important first step you must take is getting a valuation done on your property. Loan Market can organise a free valuation for you.
The reason a valuation is so important is because lenders will use the current value of your property to determine your LVR which will impact how much equity you have and how much additional money you will be able to borrow.
Getting a up-to-date valuation is critical because the valuation you had when you first purchased your property could have significantly changed.
Valuations can differ greatly different between lenders
When you are looking to use equity in your property, you will want your property valuation to be as high as possible this creates more equity for you. It’s very important to note that banks all use different valuers, and they may value your property differently. If you use the wrong valuer, you may not be able to borrow the money you need to consolidate your debts, renovate your property or make an investment.
A case study:
Adam bought a house for $900,000 in 2012 and took out a loan for $800,000. By 2015 his loan balance was $750,000 and he wanted to access some of his equity to renovate his property. His current bank had a valuer assess that his house was worth $1M. Unsure if that was the right value of his house, Adam approached a mortgage broker who had another lender value his property at $1.2M.
Adam ‘s current lender assessed his LVR to be 70% and said he could access up to $50,000 for his renovations, without having to pay LMI. The second lender assessed his LVR to be 58% and said he could access $210,000 for his renovations without having to pay LMI. In this situation
Adam would be able to borrow an additional $170,000 for his renovations by selecting a lender whose valuer thought his property was worth more.
Important information to know about refinancing to access your equity
Most lenders will lend you enough money to bring your LVR up to 80% without many questions, but every lender’s policy for releasing equity is different and if you want to borrow more than 80% of your property’s value, you will have to provide evidence of the ‘purpose of the funds’.
What is ‘purpose of funds’?
Purpose of funds is the process and policy of a specific lender to assess if it should release equity to you. As mentioned, most lenders won’t ask too many questions if you’re only asking for enough money to bring your LVR up to 80% but after any equity to be released above 80% will need to go through a process with a lender. In cases where you are borrowing a considerable sum of additional money, regardless of your LVR, your lender may require you to adhere to their purpose of funds policy.
Be aware of Lenders Mortgage Insurance (LMI)
Even if you get permission from your bank to borrow more than 80% of your property value you may need to pay for Lenders Mortgage Insurance. This added cost should be considered as it applies to any borrower whose LVR is greater than 80%, regardless of if the original loan was charged LMI or not.
Use a mortgage broker
Loan Market brokers know the lenders who have the most flexible equity release policies, offer free valuations and have the most generous LMI thresholds. A mortgage broker will make sure you select the right lender and your loan has the right structure. It’s very important to keep in mind that equity is not free money it is money you are borrowing. When you access your equity your loan balance will increase and so will your repayments. It’s always important to make sure the purpose of your additional money is well served.