21 Feb 2008

Accessing the equity in your home

Being homeowners for many years, most Australians are aware that their property value has increased significantly over the past decades. However, homeownership gives buyers the opportunity to build equity in the home. This is also the main reason why most Australians believe homeownership is the most suitable choice for them.

While home equity is one of homeowners’ greatest assets, accessing it is quite often ignored as part of financial planning. To paint you a better picture of how equity in Australian homes works, read on.

What is home equity and how does it work?

In general, home equity is the actual market value of a homeowner's property, minus what he owes.

Here’s an example:

If the home in question has a market value of $650,000 and the borrower owes $150,000, they will have $500,000 of home equity.

So, if the homeowner wants to stay in his home as well as access the equity he's built up over the years, he has various options to consider.

Conventional Mortgage Refinance

Conventional Mortgage Refinance is the most familiar option for accessing the equity in your home. Should the homeowner qualify for the mortgage, the majority of lenders will grant him 80% of the home’s value, available via a traditional refinance.

For instance, let’s say the owner’s property is worth $500,000 and he owes $300,000 on his existing mortgage. Now, If he wants to refinance up to 80%, he will be eligible to borrow $400,000. After the borrower pays off his first mortgage of $300,000, that leaves them with $100.000, minus the fees, to split his mortgage loan and spend it. Although the borrower has already paid off the mortgage, they can certainly secure a new loan on the property.

Reverse Mortgage

The second option for homeowners in accessing their home’s equity is to use a reverse mortgage. A reverse mortgage allows Australian homeowners - 60 years old or older - to turn their home equity into tax-free cash. This type of mortgage doesn’t require any income limit or credit verification. Homebuyers merely maintain their homeownership. They are also not obliged to make any mortgage payments.

The main difference between reverse and conventional mortgages is that reverse mortgages won’t allow existing homeowners to borrow up to 80% of their homes. However, it allows them to access a smaller equity’s amount, depending on their age. Interest rates on a reverse mortgage are higher than the standard financing interest rates currently offered, or around 4.95%. Even so, it is an alternative worth considering because it offers better flexibility since homeowners can free up cash without mortgage payments.

Home equity line of credit

The third option is commonly used by a lot of home loan owners in Australia. Presenting the Home equity line of credit also referred to as HELOC. A home equity line of credit allows owners to access the equity they have in their home and only pay interest if they use the property. Qualifying for a home equity line of credit is a pretty challenging journey as lender criteria is stricter compared to other options. But, compared to a conventional mortgage, a home equity line of credit asks homeowners to only make interest payments on the amount they borrowed.

Second Position Mortgage

The fourth option is a second position mortgage. If the cost to split a mortgage is high, but homeowners need access to cash before their existing loan is renewed, owners should consider applying for a second mortgage. The second mortgage typically has a particular length, during which owners have to repay the loan, also known as the term, aligned with a fixed interest rate, often higher than conventional financing.

After owners have received the loan proceeds, they can spend and utilize the money on whatever they like. Just remember, you’ll need to make regular payments on the second mortgage until it’s paid off in full. 

How to access the equity in your home?

There are few steps for potential borrowers to consider when accessing the equity in their homes.

Can borrowers use equity as a deposit?

Yes. Most borrowers use equity as a deposit in order to purchase a property or invest in their financial stability. The equity in a home can be also utilized for other debts such as car loans, student loans, and credit card debt.

Don't know how to put that equity to good use?

At FRHL, we are happy to guide you through your home equity journey!

Contact our experts to learn how equity in your home benefits your loan plan - and lifestyle!

Looking to refinance or buy a house?

Find out how our Home Loan Brokers can help you find a solution. You name it, we solve it!

Continue reading