A paint roller coated with white paint.
Refinancing has its benefits, and one of the main advantages of refinancing if you have had your mortgage for a while, is that you can refinance to release equity, if you have it.
In this article, we’ll be looking at:
- What equity is and how to grow it
- How you can convert your equity into spendable cash
- The things you can use this equity for
What is equity and how do I get it?
Equity usually increases as the time you own your property increases. Or, if you’ve paid off most of your mortgage and after you had conducted structural or cosmetic renovations. If you have held your property for a substantial amount of time, you could be eligible to refinance. Consequently, releasing this equity as spendable cash.
Releasing equity is like cashing out from your home loan.
If you’re planning to release equity, your lender will value your property. Valuations can differ depending on who conducts them, but the higher the value, the better. Why? Because it’ll increase the amount you can borrow for refinancing. Lenders use your property value to determine your total available equity and then calculate this to determine your Loan to Value Ratio (LVR) and how much you can borrow (usually up to 80% of your property value) from your home. If your lender approves your refinancing application, your equity will be released into your account with the lender.
What can I use this borrowed equity for?
Prior to your loan application being approved your lender will usually ask you what you plan to use your refinanced equity for. The answers vary depending on the individual and your future plans however, some of the most common uses include:
- To renovate: Renovating your home with borrowed equity could be beneficial whether you just feel like revamping your home or are planning to borrow more in the future. Structural renovations like upgrading your kitchen or bathroom or even add-ons like pergolas, pools, extension stories or even granny flats add increased value to your home meaning the next time you borrow, you’ll likely be able to borrow more.
- To invest: It’s also possible to use your borrowed equity to put down a full or partial 20% deposit down on an investment. This could reduce the time and effort required to save up a deposit of that amount, reduce the chances of you paying Lenders Mortgage Insurance (LMI) and free up your clash flow. If you have enough equity, you could even use the extra money you borrowed to renovate your investment, thereby increasing its value and attractiveness to potential tenants.
Other than investing it back to the property market:
It is also possible to invest in other areas outside of property. For instance, shares and stocks or various asset types.
For personal: Some individuals also refinance to release equity for leisure purposes such as a big family trip or holiday. Others refinance to release equity for a range of the above and for other purposes such as to:
- Buy a new car
- Pay off other debts
- Undergo medical procedures that would’ve been too costly to afford without the loan
Ending words:
Overall, the decision to release equity is a big one. Refinancing can be a costly process. With all interest and principal paid loans, you’ll essentially pay a higher interest at the beginning of your new loan. Hence, if you’re towards the end of your current loan refinancing at the moment might not be the best idea. Similarly, the timing of your application to refinance can also affect your property’s value and how much you’re allowed to borrow. Refinancing when the property market is steady or in a boom could be more beneficial than investing during a downturn.
Unsure about whether or not releasing equity or topping up your loan is a good idea? Talk to us by scheduling a consultation here to better understand your options.
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.
