Refinancing to Make The Most from the Equity in Your Home

What is the equity in your home?

In simple terms, the equity in your home is the difference between the market value of your home and your home loan balance. Borrowing against the equity in your home, can give you a lower interest rate and longer repayment terms when compared, to say, a personal loan or credit card.

Ways to use your home equity

You can use your home equity for a variety of purposes, including consolidating debt, making home improvements, or financing other major purchases. Let's take a look at each of these in more detail:

Making Home Improvements

If you are running out of room or have been wanting to do some renovations around the house but haven't had the funds available, you may be able to use the equity in your home to finance those improvements. This could include anything from:

• building onto your existing home
• a new roof,
• a new shed,
• that dream kitchen

When considering updating or improving your home, always be sure to weigh the cost of the improvements against the value they will add to your home.

Financing large ticket purchases such as a new car or caravan

If you are considering purchasing a new car, caravan, even an overseas holiday, rather than taking out a personal loan or using your credit card, talk to your mortgage broker about refinancing your existing home loan. This has the potential to give you a lower interest rate and you can spread the payments over the remaining loan term.

You should carefully consider, the increase to your current repayments and also the amount of interest you will pay over the remainder of your loan term.

Consolidating Debt

If you have high interest debt, such as credit cards, store accounts or unsecured personal loans, consider consolidating your debt into your home loan.

This will bring all your existing debts into one loan with one repayment. Not only will this reduce the interest rate you are currently paying but will assist with your household budgeting. Make sure you close those high interest accounts, so you don't fall into the same trap again!

The "Bank of Mum and Dad" or a Parental Guarantee

Saving for a home loan deposit has never been harder and it has now been estimated that nearly 60% of first home buyers are getting financial assistance from their parents to help fund their home purchase.

This can be done a few ways:

• by providing a cash gift or loan either from your personal savings or by refinancing your home and using the equity to borrow the cash this way
• using the equity in your home as added security to assist a family member's home purchase. Also known as a family security guarantee, you do not need to provide a cash deposit and children can borrow up to 100% of the purchase price. By providing a parental guarantee, if your child were to default on the loan, and the sale of their home did not cover the full amount owing, the lender can then turn to you to cover the amount you have guaranteed.

Purchasing an investment property

You don't always need a cash deposit to buy an investment property. Similar to a parental guarantee, you can use the equity in your home as added security for that investment property you have your eye on. You will also have the same considerations; if you use your home as security and you default, the lender can sell your investment property and then recoup any outstanding debt, after the sale of the investment property, from you. This may include selling your home.

Things to consider before you refinance your home loan

Before refinancing and borrowing against the equity in your home, there are several things you should consider:

The value of your home: This will affect how much you can borrow. Known as the loan to value ratio (LVR), a lender will normally only allow you to borrow up to 80% of the value of your home. Anything over 80%, would be considered by the lender to be an additional risk and you may need to pay lender's mortgage insurance.

Repayments: Can you afford the new repayment amount? You will still need to meet the lender's serviceability criteria. This is calculated by taking into consideration your monthly income less your monthly living expenses, repayments on other debts such as credit/store cards, personal loans etc. and the new repayment amount. To find out more about how much you may be able to borrow, check out our borrowing power calculator

Are you paying a loyalty tax?: Are you getting the best deal for your money. Your existing lender may be charging you a higher interest rate than their new customers. We recommend you do an audit of your home loan, with one of our mortgage brokers every 2-3 years.

By reviewing your loan, we can make sure you still have the best product to suit your individual needs. With a home loan normally 25 years or more, making sure your home loan is regularly reviewed could save you thousands of dollars in interest!

Future proofing against interest rate rises: Talk to one of our mortgage brokers about the types of home loans available to reduce the impact of future rate rises. This could include considering a fixed rate home loan. Fixing the rate will give you peace of mind knowing what your monthly repayment will be for the fixed term; helping with your household budget. There are some limitations to a fixed rate loan:

• limited or no ability to make additional payments
• no opportunity for an offset account
• no redraw facilities

If you think that a fixed rate is too restrictive, you have options available such as a split loan. This gives you the freedom of having part of the loan amount at a fixed rate and part at a variable rate. Talking through your goals, and what's important to you, with one of our home loan experts can help you make the right choice for your needs.

Fees and Charges: You should consider all the fees and charges payable on refinancing your home. These may include:

• paying for an independent valuation of your property
• paying the lender an application fee
• a mortgage discharge fee – the lender may charge a fee to remove the legal 'hold' they have over your property
• a break fee - if you move your loan during a fixed term period.

If you would like to find out more about borrowing against the equity in your home, we would be more than happy to have an obligation free chat with you about your situation. We will be able to assess your individual circumstances and provide you with a range of options from different lenders, to suit your needs.

Get in touch with us today to find out more!