Have you been repaying your mortgage for some time and/or made additional ad hoc payments over time? Have property prices increased in your area? If yes, you may have equity available in your home that could pay for renovations, an investment property or a lifestyle purchase!
Your home equity is the market value of your property minus what you owe on your existing home loan and you’re able to access this equity (up to 80% of the property’s total value) in five ways:
1.Redraw facility
A redraw facility allows you to access additional repayments that you may have made on your loan over and above your minimum repayments. There are obvious benefits in making additional repayments as your reduced balance will result in less interest being paid. Many borrowers utilise this feature because it reduces the temptation to access surplus funds. To utilise this feature, you are usually required to request the lender to release those additional repayments to you and this can take a little time.
While many loans have this feature, not all loans do. Generally, fixed interest loans do not have a redraw facility. Many lenders also have conditions around the minimum amount that can be redrawn.
2.Offset account
Rather than pay additional repayments into their loan account, many borrowers prefer to make these payments into an offset account. An offset account could be your everyday or transaction account, or a separate account that is linked to your mortgage. Each dollar in these accounts ‘offsets’ the balance of your loan by reducing the interest paid. Because the offset account is just like an everyday banking account, you can access your extra funds at any time, but using these funds will reduce the amount of interest you save.
3.Refinance
Refinancing your mortgage can release equity within your property. If these funds are to be utilised to purchase additional items, then the associated loan can be set up as a new loan account. These funds are separately identifiable or there’s the option to increase (or top up) by taking out a new loan split with your current lender.
Refinancing your mortgage to access equity is a big financial decision and one not to be taken without advice from your finance specialist.
4.Guarantee
You can utilise the equity in your home as security for other borrowings. This is most used if you were looking to buy an investment property. Many lenders require you to contribute a 20% deposit when purchasing a property, otherwise you will be required to pay Lenders’ Mortgage Insurance (LMI). You can, however, utilise the existing equity in your home as security allowing you to borrow more than 80% (and up to 100%) for the investment property (providing your existing equity is sufficient).
5.Line of credit
With the additional equity that has been created in your property, you could apply for and establish a line of credit. A line of credit allows you the flexibility to draw down funds up to the approved limit and repay these amounts at any time without reference to your lender. It is like a revolving credit facility that you can use to renovate, invest or use as needed. Interest will only calculated on the current balance. A line of credit provides greater flexibility but at higher interest rates than a traditional loan. There can also be additional fees.
It should be noted that while items 1 and 2 allow you to access equity created from additional loan repayments, they will not allow you to access equity created from increases in your property value. You will need to utilise the methods available in 3, 4 and 5 to access equity created through an increase in your property’s value.
Need help choosing the correct method to access your home equity having regard to your personal needs? Our experienced team is here to help you navigate the maze of equity and mortgage options. Speak to one of our finance specialists today.
