Use Equity To Your Advantage To Buy Property In Australia
Accessing the equity in your property is an excellent strategy for those of you who intend to purchase a new property, make additional investments or need to tap into savings for other purposes. You get to convert the equity you have built up in your property into cash, allowing you to diversify your investments or reach other financial goals.
Sounds pretty good, hey?
But as with any other financial strategy, with great sounding deals come significant responsibilities: when you choose to cash out equity, you put your property on the line. If the value of your property decreases, you could end up owing more than your property is worth.
Before you rush into getting cashing out, take a closer look at what taking a home equity loan in Australia entails, when you may want to consider this financing option and whether it is a strategy that is best for you.
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What is Home Equity?
Home equity is the difference between the current market value of your property and the amount you owe the bank. The amount fluctuates over time as the value is tied to market forces.
Equity in a house is initially acquired with the down payment you make during the initial purchase of the property. As you repay your mortgage, the outstanding loan balance will be reduced, increasing your home equity level.
Another way to build up equity is to increase the value of your property by maintaining and improving it. If your property happens to be in an ideal location, chances are your property is likely to achieve long-term capital growth.
How does cashing out work
Australian home equity loans generally have lower interest rates than other forms of borrowing. We can’t say which is better – it depends on your financial goals and preferences.
To evaluate the loan amount, lenders assess your property’s current market value and the remaining mortgage balance. As the value of your property secures the home equity loan, the risk to the lenders is lowered.
Another product closely related to a home equity loan is a reverse mortgage. It is mainly reserved for retirees and allows them to tap into the savings they have accumulated in their property. With a reverse mortgage, no regular repayments are needed (it is entirely up to you!), and you have guaranteed lifetime occupancy – the outstanding balance will be due either when the property is sold or when the borrower passes away.
How much can I borrow with a Home Equity Loan?
Generally speaking, you can calculate the amount you can borrow with this formula:
(Property’s Value x 80%) – Mortgage Balance = Accessible Equity
For example, if your Property’s Value is worth $600,000 and the remaining balance on your mortgage is $250,000, then the Accessible Equity is $230,000.
Most lenders are happy to lend up to 80% of the property’s loan-to-value ratio (LVR), though policies differ between lenders. Some lenders can do higher than 80% LVR. However, as the risk for lenders increases, the lender would require the borrower to pay an extra fee (i.e., lender’s mortgage insurance or LMI) if the borrower defaults.
Other lenders have strict cash out policies, reducing the amount of money you can borrow. They are cautious when lending money in the form of equity loans as some borrowers use their equity carelessly and need more evidence of how they are spending the borrowed funds.
Can I buy investment property with a home equity loan as an expat?
As an Australian expat, you may be eligible for a home equity loan in Australia, which allows you to borrow money against the equity in your Australian property. However, obtaining a home equity loan as an expat may be more complex than it is for Australian residents due to factors such as limited credit history and unfamiliarity with the local banking system.
To qualify for a home equity loan in Australia as an expat, you will typically need to provide evidence of your income, employment status, and visa status. You may also need a certain amount of equity in your property and meet other eligibility criteria the lender sets.
It’s important to note that home equity loans come with certain risks and fees, such as interest charges and potential penalties for early repayment. Therefore, it’s crucial to carefully consider your financial situation and assess whether a home equity loan is the right option for you before proceeding.
When applying for a home equity loan as an expat, working with a mortgage broker specialising in expat lending can be helpful. They can assist you with the application process, guide the documentation required, and help you find the best loan option for your needs. Our mortgage brokers at Odin Mortgage specialise in home loans for expats and can help you determine the right choice for your situation.
Reasons to use your home equity
There are not many limits on how you can use your home equity, but there are a few ways to make the most out of it:
You can use a home equity loan to consolidate high-interest debt into a single amount at a lower interest rate. Some borrowers use it to pay off their personal debt (which is also fine!) The downside is that you turn unsecured debts, such as credit card debt, into debt now backed by your home.
Home renovation and improvement
Besides making a home more comfortable for you, by renovating your home, you could raise the property’s value and draw more interest from prospective buyers when you rent it out or sell it later on. However, before using home equity for home improvements, research to see if the progress will produce a good return on investment to avoid overcapitalisation.
Investments come with risks because there is no guarantee that the stock market will perform well. The same goes for investing in real estate. You can’t be sure that the investment property won’t lose its value or fail to bring in the income needed to get a return on your investment. So before you proceed, look into your options and see whether the investment is wise.
If you have an emergency and no other means to come up with the necessary cash, a home equity loan is an intelligent way to stay afloat (only if you have a backup plan or are confident that this financial situation is temporary). However, the application process time associated with accessing home equity may not be ideal for a time-sensitive emergency.
Home Equity Loans have their pros and cons
The advantages of getting a home equity loan include the following:
- Lower interest rates compared to other types of personal loans or home loans
- Higher chance of approval compared to different kinds of home loans
- Higher flexibility as the funds can be used for any potential purpose
- Higher investment potential as borrowers can unlock the equity in their property to use for other investments
- Complete freedom to repay interest amount
The disadvantages of getting a home equity loan include the following:
- Increased outstanding debts hence increasing monthly repayments and repayment duration
- Increased fees (e.g., transaction costs, lender fees)
- Risk of reduced credit score
- Risk of foreclosure
How to prove the purpose of your Home Equity Loan
As an Australian expat, you may be required to provide evidence of the purpose of your home equity loan to the lender. This ensures that the funds are being used for a valid and legitimate purpose, such as financing home improvements, paying off high-interest debts, or investing in other properties.
To prove the purpose of your home equity loan, you may need to provide the following documentation:
- Quotes from contractors or builders for home improvements
- Statements from creditors for debts being paid off
- Proof of other investment opportunities
- You may also need to provide a detailed plan outlining how you intend to use the funds
Additionally, some lenders may require that the funds be disbursed directly to the intended purpose, such as paying off debts or financing home improvements. This ensures that the funds are being used for their intended purpose and not for other expenses.
Home Equity Loans for expats
- Refrain from resorting to a home equity loan to fulfil your monthly needs. Investing in your living budget won’t get anything valuable in return. You might end up consumed by debt.
- Taking a home equity loan in Australia to fund entertainment and leisure is also not a good idea. This would worsen the debt issue because you risk your property for extravagant vacations, entertainment and leisure.
- Don’t borrow more than you need. Be financially disciplined, and don’t put your house at risk of foreclosure for a frivolous purchase.
- There is a limit to how much you can borrow.
The market is highly competitive, and lenders offer a vast range of products, including home equity loans. Is releasing your home equity the best thing for you? Which lender to go with?
Reach out to us to find the best solution for your circumstances!