How to access equity in your property
IT GOES WITHOUT SAYING THAT IF YOU HAVE A HOME LOAN, YOUR FIRST GOAL SHOULD BE TO WORK ON PAYING THE THING OFF! AS SUCH, THE WAY HOME LOANS TEND TO PAN OUT IS THAT YOU WILL HAVE MINIMAL SAVINGS AS ALL YOUR MONEY IS GOING TOWARDS REDUCING YOUR HOME LOAN.
Of course, any extra money that you put into your home loan can be accessed again via a redraw facility so whilst you might have savings, the reality is your home loan’s redraw facility is really one and the same as your savings account.
Over time, two things are likely to happen with your property:
It will increase in value (significantly for those living in Sydney & Melbourne over the past two years)
Your home loan will reduce
These two factors will mean that your overall equity position (property value less debt) will improve allowing you to access this equity for opportunities/needs that will arise over time such as completing a renovation, buying an investment property, investing in shares, buying a new car or taking a holiday.
If you have enough money in your redraw facility to make the purchase you require then you simply transfer this money out. However, if you require more money than is available in your account you will have to seek approval from your bank which can be an issue depending on the amount of money you are asking for.
Keeping the banks on a need-to-know basis
When you apply for what’s called a ‘cash out’ loan, the depth of information you are required to provide a bank will depend on the amount of money you are asking for and what the bank’s policy is.
For instance, if you are interested in purchasing an investment property for $600,000 and would like to use equity in your home to cover the 20% deposit + costs ($150,000 all up) some banks will say, “We can approve this money but we’re not going to release it until you’ve found a property, presented us with a Contract of Sale and let us complete a valuation first.”
As you can imagine, this will cause problems in the case that the property you’re after is going up for auction. In this situation you really need that money to be able to exchange on the property there and then, not after the bank’s done a valuation. Also, the reality is that it can take a bank 2-3 weeks to release this cash once they’ve approved it due to the approval process and documentation required.
The great thing about the Australian home loan market at the moment is that it is very competitive, and lenders are keen to win new business. The most obvious way they can do this is through offering attractive interest rates. However, the other way that a lot of people forget about is via policy.
In relation to cash out, some lenders will require you to show exactly what you are going to use the money for before they allow you to access YOUR equity. I’ve highlighted that word because I think as long your total facility with the bank is at a suitable LVR and you can demonstrate that you can service the loan, you shouldn’t have to jump through hoops in order to access equity that you’ve created through your own hard work.
Luckily there are lenders who also take this view and have policy in place whereby as long as your total LVR is below 80%, they will let you borrow up to $1,000,000 without having to provide great detail as to what the purpose of your funds are for.
So, if you are considering a cash out loan, I would suggest you understand what your lender’s cash out policy is to see if this is feasible. If it’s not, remember there are other lenders out there who are willing to lend you money without you having to go through a whole bunch of red tape.
Kind regards,
Tim Russell