As a homeowner, taking out a second mortgage and refinancing your home could potentially give you access to capital to help fund future purchases, renovations or other projects. This is in the form of equity in your current home.
If you’ve owned your home for a few years and been consistently making your home loan repayments, chances are you’ve built up some equity. Refinancing home loans in Sydney could help you use that equity.
Accessing equity through refinancing your home
Equity is the difference between the current market value of your home and the outstanding balance on your mortgage. This is the proportion of your property that you own outright. With property values increasing around the country, your increased equity can be a useful tool to access.
Here’s an example to help illustrate the process. You bought a home in Sydney five years ago. It was valued then at $1,000,000 and you put down 20% deposit or $200,000, so your mortgage was for the remaining $800,000. You have paid off $100,000 of the mortgage and, today, the property is worth $1.3 million. If equity is the current value of the home minus what you owe on your home loan, in this case you now have 46% equity
Refinancing your home loan
So, you’ve established that you have some equity to access in your existing home loan. Now you need to find out how to access it. In order to access your equity to use as capital, you will need to refinance your home loan. Sometimes, this is known as a cash-out refinance. This money can be released into your new mortgage.
When you refinance your home loan in Sydney, you pay off your current mortgage by taking out a new mortgage.
In order to get the best home loan refinance to suit your circumstances, you will have to undertake the refinance process. This Includes:
1. Work out how much equity you have
Before refinancing your home, you will need to establish how much equity you have and how much you have access to. Your lender will give you an official number when you begin the refinance process, but it is helpful to have a general idea before starting the process.
2. Plan what you will spend the money on
Before accessing your equity through refinancing your home, you should know why you are doing it. If you are buying a second property, it is a good idea to have a location or value of property in mind. If you are planning to renovate, gather a few quotes for the work you want done so you have a rough idea of the overall cost.
3. Check your credit file
Like your first home loan, a second mortgage requires you to be creditworthy and therefore have a reasonable credit score. With that in mind, order a free copy of your credit report (from Equifax, Experian or Illion) and make sure the report doesn’t have errors, as they may be unfairly dragging down your credit score. If there are errors, you can apply to have them removed.
4. Talk to a mortgage broker in Sydney
A mortgage broker will provide you with advice on how to refinance a home loan in Sydney. They bring a deep knowledge of the finance market and lending trends as well as a network of connections with various financial institutions. This makes it easier for you to try to find the best home loan refinance.
5. Get your paperwork in order
The paperwork for refinancing homes is very similar to your initial home loan application. You will need to show your proof of identity, income, expenses and any credit extended to you.
6. Choose a new mortgage after consulting with your mortgage broker
Deciding what type of mortgage to take out when you refinance your home will depend on your goals and financial situation. Your mortgage broker in Sydney will be able to guide you through the options, providing advice on rates and terms so that you can make an informed decision.
Things to consider before refinancing homes
Before refinancing to access equity, there are a few things to keep in mind:
1. Increasing the amount you owe means your repayments will increase too. You may need to extend your loan term in order to comfortably pay off what you owe. When looking for the best home loan refinance options for you, you should take into account the loan period and cost of monthly repayment.
2. If your first mortgage is a fixed-rate mortgage, you may be required to pay a break fee to exit the fixed-rate period before its official end.
3. There may be costs involved in the refinancing process.
4. Timing is important for refinancing homes. Because your lender will likely need an updated valuation of your home to assess your equity, the state of the market at the time will affect how much your property is valued at. If the market is in a downturn, ask your mortgage broker in Sydney if this is the best time to be refinancing to cash out equity.
Accessing equity through refinancing
Using the equity from your home loan is a strategic financial move that requires careful consideration and expert guidance. Increasing property values make equity a valuable tool for funding future plans. Refinancing your home could be the key to unlocking this potential. You can consider consulting with a mortgage broker in Sydney, assessing your plans and financial means in trying to find the best home loan refinance options for you.
Do you have untapped equity you’d like to access? Or are you interested in finding out more about the refinancing process? Loan Station, a finance broker based in Sydney, can help. Get in touch today.
