Investing in your home can be expensive, especially when you need to make improvements or repairs. Rather than financing such upgrades with a personal loan, credit cards or even a second mortgage, an equity release might be your best answer. With an equity release, you are taking out a loan to replace what’s left owing your first mortgage with a larger mortgage, and taking the difference in cash. This is also commonly known as cash-out refinancing.
Difference Between An Equity Release And A Home Equity Loan
As explained above, an equity release is replacing your current mortgage with a larger one and taking the difference in cash. In contrast, a home equity loan is borrowing against your available home equity, which is the difference between the current market value of your home and the total loan outstanding.
Thus, an equity release pays off your existing mortgage for a new one, while a home equity loan gets you a new loan in addition to your existing mortgage.
Here is an example of an equity release:
- Property value: $600,000
- Remaining loan amount: $320,000
Most lenders require that the homeowner’s new loan, after the equity release, must be no more than 80% of the value of the home; therefore, available equity for release equals the property value x .80 – remaining loan amount:
$600,000 x .80 = $480,000 – $320,000 = $160,000 available equity for release
So $160,000 is the maximum cash out this homeowner can get with a home equity release.
| Property Value | Remaining Loan Amount | 80% of the property value | Maximum Amount You Can Refinance For | Maximum Equity Release |
|---|---|---|---|---|
| $600,000 | $320,000 | $480,000 | $480,000 | $160,000 |
You can read more about the differences between an equity release and a home equity loan here.
What Are The Benefits Of An Equity Release?
Releasing the equity in your home can help lessen the burden on your purse strings by providing numerous financial benefits. It also has some advantages over other ways of borrowing, such as a personal loan or a second mortgage.
Some of the potential benefits and uses are:
- Better Mortgage Terms: when you opt for an equity release, you can secure better loan terms and interest rates, especially if you initially purchased your home at a very high interest rate.
- Lower Rates: mortgage and refinancing rates are generally lower than credit-card interest rates and other forms of borrowing. This means you are probably better off financing your home improvements or repairs with an equity release than with most other options.
- Consolidated Debts: you can use the money to pay off your higher-interest debt, such as credit cards or student loans.
- Home Improvements: one of the major reasons people apply for an equity release is home improvements. Such upgrades can eventually increase the equity in your dwelling. This is called a strategic home renovation.
- Investment Cash: Another common reason people apply for an equity release is to invest in properties and shares. Our specialist brokers can show you loan products with no cash-out restrictions, so you can maximise your ability to invest.
Things To Consider Before Getting An Equity Release
There are, however, a few things to keep in mind before committing to an equity release. Here are some of them:
- Refinancing Costs: some expenses associated with refinancing include appraisal fees, credit report fees and attorney fees. These costs can run you thousands of dollars.
- Greater Foreclosure Risk: if you end up with higher repayments, you may not be able to make them, leaving you facing the risk of foreclosure. You should not take an equity release if you have a history of bad spending habits.
- Lengthening Loan Period: if you are using an equity release for debt consolidation, make sure you are not lengthening the life of your loan.
- No Immediate Cash In Hand: when you opt for an equity release, the payment is not immediate. You will receive the cash a few days after settlement. Thus, if you want immediate cash in hand, an equity release might not be the fastest option.
Please note that major banks are more cautious about approval when they have little evidence of what you are going to do with the money.
Requirements For An Equity Release
Before you compare lenders and approach them for refinancing, look at these factors to see if you can expect to qualify:
- Good Credit Score: since refinancing is essentially taking out a new loan, lenders will assess your credit score and history. A credit score of at least 650 is required with most lenders. Some may accept a lower score.
- Debt-To-Income (DTI) Ratio: DTI is calculated by adding up the total amount of debt you owe and dividing it by your gross income. Most lenders require a DTI ratio of six or less.
- Equity Requirements: with most lenders, you will need to retain at least 20% equity in your home after your equity release. Some lenders may allow you to leave less than 20% equity in your home, if you pay Lenders Mortgage Insurance (LMI). Figure out how much cash you need from your equity release and determine before applying whether you have enough equity in your home to get that amount.
When Should You Consider An Equity Release?
Since you are leveraging your home, you must keep in mind that an equity release requires financial discipline. Equity releases are suitable for borrowers who want to make home improvements and pay off personal and credit-card debts. But if you have a history of volatile spending, you might not be able to make your repayments, thus risking foreclosure.
How Much Can You Borrow With An Equity Release?
Usually, our lenders will allow you to borrow up to 80% of the value of your home, up to $1,000,000, if you can provide your stated purpose for the money. One of our lenders will let you borrow up to 90% of the property value, up to $800,000, with evidence of how you will use the funds. Please note that LMI charges will apply.
Does An Equity Release Affect Your Credit Score?
Refinancing does have an effect on your credit score. However, the impact is usually short term. To fully understand the effects of refinancing on your score, click here.
What Is The Process For An Equity Release?
Applying for an equity release is similar to taking out a new loan. Before you start your application process, work out how much you’ll actually need. We do not recommend borrowing more than you need.
Once you have worked out the amount you need to borrow, the equity release process will work like this:
- 1. Compare home loans to find the best deal. Our specialist mortgage brokers can expedite the process by comparing 50+ lenders on our panel. Once you select a lender, they will usually require a property valuation report at this stage.
- 2. Our Home Loan Experts mortgage broker will help you work out what the new mortgage will look like. This includes your repayments, loan terms and period.
- 3. Next, our mortgage broker will submit your loan application, which is essentially like applying for a new home loan.
- 4. If you decide to switch to a different lender, your current lender will forward all the necessary documents to your new lender.
- 5. If the lender approves your loan, settlement will follow. You should then be able to access the cash from your equity release in a few days.
Want To Get An Equity Release?
Contact us at 1300 889 743 or fill in our online assessment form and our specialist mortgage brokers will help you refinance your home loan!