Okay, so this may be a bit strange coming from someone who actually OWNS property, but I need a better understanding of the process of accessing equity. I am a little bit naive when it comes to all the financial nitty gritty..trying to learn!
How does the amount drawn affect your loan? Does it change your loan payments? How does one go about accessing equity? Does the bank do a valuation to determine the amount of equity available? What happens if you decide to sell the property down the track? Is the amount provided to you like cash ie. into your bank account?
I just need a clearer understanding of all of this as I am finding myself quite confused with how it is accessed and if it has any impact on your current loan situation/payments.
Thanks!
hangingupsidedown wrote:How does the amount drawn affect your loan?Your loan increases in size.
hangingupsidedown wrote:Does it change your loan payments?Yes, proportionally to the increase in the size of the loan.
hangingupsidedown wrote:How does one go about accessing equity?You can either increase the loan amount with your existing lender by asking them to value the property and increase your limit, or (my preference) go through a broker and take out a whole new loan for 80% of the current value of the property. You can go to a higher LVR eg 90 or even 95%, but interest rates go up and LMI is payable. Of the new loan, some goes to pay out your existing loan, the remainder is cash in your bank account for you to do whatever you want with. (Though if used for private purposes, the interest on the increased amount isn't tax-deductibe.)
hangingupsidedown wrote:Does the bank do a valuation to determine the amount of equity available?Yes, or if you're a bit smarter, you first instruct a valuer to do an assignable valuation for you. ie You buy the valuation before approaching the lender, then you retain control. When you have a valuation you're happy with, and your broker has lined up finance that you're happy with, then assign the valuation to that lender. If you ask the financier to get a valuation, you're then locked into that financier, unless you want to pay for another financier to get another valuation. Better to keep the lenders competing for your business as long as possible!
hangingupsidedown wrote:What happens if you decide to sell the property down the track?Then you have to pay back the higher amount, ie 80% of the new value.
hangingupsidedown wrote:Is the amount provided to you like cash ie. into your bank account?Yes!
Sounds like you had a pretty good idea for somebody who claimed not to get it – well done!
If your property is valued by the financier at $1,000,000 and will advance 80%, it means they will allow you to borrow up to $800k against the property, PROVIDED you can service the debt. If your current mortgage is say $600k you will have $200k which is still accessable.
If you are to draw upon these additional funds then you will have a few options – refinance (start loans over) at $800k, continue with the existing loan + separate loan/line of credit etc for $200k or redraw back to the $800k (if this was your original loan amount and you have repaid $200k equity).
You will have to pay interest regardless of which option that you select.
Depending upon the option taken will determine how much it costs in fees to establish.
If you use the redraw method, you will be required to repay the loan in the original time of the contract eg if you are 10 years into a 25 year loan, you will only have 15 years to repay the entire amount, hence refinancing may be a better alternative (lower repayments but higher total cost).
If you sell down the track, the first creditor paid is the bank (even if the debt is to be transferred to another property).
A line of credit is like having a credit card with a high limit but no interest free period. It is flexible to allow you to pay interest only and you can pay as much or little capital back as there are no set repayments.
"Accessing your equity" always sounds better than "increasing your loan"
It's prudent to consider them the same thing.
so does that mean if i take a 80% LVR loan then i have no access to the 20% i inititually put in? unless i get the property re evaluated later down the track?
ume wrote:so does that mean if i take a 80% LVR loan then i have no access to the 20% i inititually put in? unless i get the property re evaluated later down the track?That's correct.
The Bank will give you access to 80% of the property's value, regardless of what you've already put in..
So, if it's worth $300k and you put in $60k deposit, you can borrow up to $240k.
Of course, you also need to factor in any exisiting mortgage. If, for example, you still owe $200k, then you can only borrow a further $40k to top up the borrowings to $240k.
If, say, you borrowed $240k and put in $60k deposit, and still owed $240k, you have no access to the $60k at that point.
You would need to either wait until the proerty goes up in value before you could use some equity, or pay more off the loan, or both.
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