Using the equity in your home gives you access to funds without selling the property. For many borrowers, this involves refinancing the existing home loan to a larger amount and receiving the difference as cash. Lenders commonly refer to this as a cash-out refinance or equity release.
The funds may be used for renovations, debt consolidation, investing or other approved purposes. The amount available depends on your property value, existing loan balance, borrowing capacity and the lender’s cash-out policy.
In this article, we are going to give you the complete ins and outs of equity release so you can understand and use it.
Difference Between An Equity Release And A Home Equity Loan
An equity release generally involves replacing your existing mortgage with a larger home loan and receiving part of the new loan as cash.
A home equity loan works differently. You borrow against the available equity in your property while keeping the existing mortgage in place. For example:
- Property value: $600,000
- Existing home loan: $320,000
- 80% of the property value: $480,000
- Potential equity available at an 80% loan-to-value ratio: $160,000
The calculation is:
$600,000 × 80% = $480,000
$480,000 − $320,000 = $160,000
In this example, $160,000 represents the equity potentially available before considering the borrower’s income, expenses, debts, lender policy and the purpose of the funds.
| 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 |
Having $160,000 in usable equity does not mean a lender will approve a $160,000 cash release. The lender still assesses whether you qualify for the larger loan.
What Are The Benefits Of An Equity Release?
An equity release gives you access to funds through your home loan rather than relying on unsecured debt.
Possible uses and benefits include:
Better home-loan terms
Refinancing gives you an opportunity to review your interest rate, repayment structure and loan features at the same time as releasing equity.
Lower interest rates than some unsecured debts
Home-loan rates are often lower than credit-card or personal-loan rates. Extending short-term debt over a home-loan term, though, could increase the total interest paid.
Debt consolidation
Equity may be used to repay credit cards, personal loans and other debts. The new repayment structure and total loan term matter as much as the interest rate.
Home improvements
Renovations and repairs are common uses of released equity. Borrowing for renovations still needs to fit your repayment capacity, even where the work is expected to improve the property.
Investment
Some borrowers release equity to fund a deposit or purchasing costs for an investment property, or for other investments. Lender requirements vary according to the amount released and the intended use.
A lower interest rate does not automatically make an equity release cheaper. Refinancing fees, the new loan term and the amount borrowed all affect the long-term cost.
Things To Consider Before Getting An Equity Release
Releasing equity increases the debt secured against your property. Before refinancing, consider:
Refinancing costs: Discharge fees, application costs, valuation expenses, government charges and other refinancing costs vary between lenders and loans.
Higher repayments: A larger loan normally means higher repayments unless other changes, such as a lower rate or longer loan term, offset the increase.
A longer loan term: Moving short-term debt into a mortgage may reduce the monthly repayment while extending the period over which you pay interest.
Your property is security for the debt: Falling behind on repayments places the property securing the loan at risk.
Access to funds is not immediate: Cash is generally released as part of, or following, settlement rather than when you apply.
Lenders also pay close attention to the purpose of larger cash-out requests. Supporting documents may be required, particularly where a borrower wants a substantial amount or proposes using the money for investment or another specific purpose.
Requirements For An Equity Release
Lenders assess an equity release as a new lending application, even where you refinance with your current lender.
Their assessment usually includes:
Credit history: Your repayment history, credit enquiries and existing debts form part of the lender’s credit assessment.
Borrowing capacity: The lender assesses your income, living expenses, debts, dependants and proposed repayments under its servicing rules.
Debt-to-income ratio: Your total debt relative to gross income may affect which lenders are available and how much they are prepared to lend.
Property value: The lender usually orders or accepts a valuation to determine the current value of the property.
Available equity: The difference between the property value and existing debt sets the starting point for working out how much equity is available.
Loan-to-value ratio: Borrowing above 80% of the property value may attract Lenders Mortgage Insurance or tighter lending requirements.
Purpose of funds: Some lenders ask for evidence showing how the released funds will be used.
A borrower with substantial equity may still fail a lender’s servicing assessment. Equity determines how much security is available. It does not replace the need to prove that you meet the lender’s repayment requirements.
When Should You Consider An Equity Release?
An equity release suits borrowers who have enough usable equity, qualify for the larger loan and have a clear reason for accessing the funds.
Common purposes include:
- Renovating a home
- Consolidating higher-interest debts
- Paying approved investment expenses
- Funding an investment-property deposit
- Covering other substantial planned expenses
Before proceeding, compare the benefit of receiving the funds against the cost of increasing your mortgage. Debt consolidation deserves particular care. Moving a credit-card or personal-loan balance into a 20-year or 30-year home loan may reduce the repayment but leave the debt outstanding for much longer unless you maintain higher repayments.
How Much Can You Borrow With An Equity Release?
The amount available depends on your property value, current mortgage, borrowing capacity, proposed loan-to-value ratio and the lender’s cash-out rules.
A common way to estimate usable equity is: Property value × desired LVR − existing home loan balance
For example, a property worth $600,000 with a $320,000 mortgage has $160,000 of potential usable equity at an 80% LVR.
This figure is only an equity calculation. Your approved amount may be lower after the lender assesses your income, expenses, existing debts and purpose for the funds.
Some lenders consider equity releases above 80% LVR, although Lenders Mortgage Insurance and extra lending restrictions may apply.
Does An Equity Release Affect Your Credit Score?
Applying to refinance usually creates a credit enquiry because the lender assesses you for a new home loan. A single application does not determine your credit score on its own. Your broader credit history, repayment conduct and number of recent credit applications also form part of your credit profile.
Submitting applications to several lenders in a short period may result in multiple credit enquiries. Comparing lender policy before applying helps reduce unnecessary applications.
What Is The Process For An Equity Release?
The equity-release process is similar to refinancing a standard home loan. Before applying, work out how much you need and what the funds will be used for. Borrowing more than required increases your debt and interest costs.
The process generally works as follows:
- Review your current home loan and calculate the amount of equity you want to release.
- Compare suitable lenders. Home Loan Experts has access to more than 50 lenders on its panel. The lender will generally need a current property valuation before confirming how much equity is available.
- Work out the proposed loan structure. Your broker will review the loan amount, repayments, interest rate, features and loan term.
- Prepare and submit the refinance application. The lender will assess your income, expenses, liabilities, credit history, property and purpose for the cash release.
- Arrange discharge of the existing mortgage if you are changing lenders. Your current lender and new lender coordinate the discharge and settlement process.
- Complete settlement. Once the refinance settles and the lender releases the approved funds, the money is paid according to the agreed loan structure and lender instructions.
The lender’s cash-out requirements should be checked before an application is lodged. A lender that accepts your income and property does not necessarily accept the amount or purpose of the equity release.
Want To Get An Equity Release?
If you want to release equity from your property, we can assess your available equity, borrowing capacity and lender options before you apply.
Call Home Loan Experts on 1300 889 743 or complete our online assessment form to speak with a specialist mortgage broker.