With social distancing restrictions affecting many Australian workplaces, a lot of us have had to rethink our personal finances, including our home loans. And with big banks and smaller lenders slashing interest rates to new record lows, it’s no surprise that many Australians are refinancing their mortgages, as shown by recent ABS data.
While many people refinance in order to get a lower interest rate and a cheaper home loan (useful if your income has been affected by COVID-19), or to help them clear their debt faster, a third option is to refinance in order to access the equity in your property.
Equity is the percentage of your property that you own outright and doesn’t have a mortgage owing on it. If you’ve been keeping up with your mortgage payments and making extra repayments, you may have built up some equity in your home or investment property. If your property is located in an area that has seen house prices increase significantly since you first took out your mortgage, its value may have also increased, meaning you may have more equity available than you expect.
Equity can be used as security when you refinance your home loan, much like your deposit when you applied for your first home loan. The more equity you have available, the more mortgage options you may be able to choose from.
If you’re interested in refinancing your home loan and accessing your equity, it’s important to compare home loan options from different banks and mortgage lenders before you decide which one may be right for you. To help you get started, here are five home loans that you could use to refinance and get cash out from your equity:
How can I use my equity?
The security from your equity can be used to lower your loan to value ratio (LVR) when you refinance, which may help you qualify for lower interest rates. You can also use this security to borrow more money when you refinance, and effectively access your equity as either one lump sum or as a flexible line of credit.
Borrowing an extra lump sum when you refinance can let you make a single large purchase, such as a car. Alternatively, you could use the money to pay off any other debts you owe, and effectively consolidate your maxed-out credit cards and outstanding personal loans into your home loan. As home loans often have generally lower interest rates than most credit cards, personal loans and car loans, you may be able to pay less in interest charges from month to month, and reduce some pressure on your household budget.
A line of credit works a lot like a credit card, with a credit limit based on your available equity. You can borrow and repay extra money when you need it and only pay interest on what you use, which can be useful for managing longer-term projects such as renovating your property.
It’s important to remember that accessing your home’s equity means borrowing more money, which means your home loan will likely take longer to pay off, costing you more in interest charges. Also, if you choose to consolidate other debts into your mortgage, you may end up paying much more in total interest charges on these debts over the course of your home loan’s longer term than you would by paying them off individually. Consider contacting a mortgage broker or financial counsellor before choosing to access your equity.