How to make cash out refinance work for you

When you refinance your home loan, it’s often to get a better interest rate than you have on your current home loan, in order to pay off your mortgage faster like a pro. This will save money in the long term.

Cash out – everything you need to know

When you refinance to borrow money (from your property’s equity) to use for renovations or a new car, for example, lenders call this a “cash out” refinance.

Sometimes people take out a personal loan against their mortgage or borrow some money to pay off credit card debt.

You can essentially borrow money to put towards anything – a wedding, a new roof, your third Lamborghini – but only up to a certain amount. Each lender has their own rules and sets their own limits, and above these limits you will need to prove how the funds will be used. No lender has faith in you launching a small-scale newspaper operation, for example.

Your equity is the difference between the value of your home and the amount you still owe on it. Thanks to the significant rise in property prices over the last decade or so, it could be a substantial sum.

For example, let’s assume you bought a house 10 years ago for $500,000 and have $200,000 left on the home loan. If this property is now valued at $800,000 then your equity is $600,000.

Most lenders allow borrowing of 80% of the value of the property, minus the debt that you have left to pay. So in this example, you could access $440,000 of your equity. With this sum, you could make significant investments and potentially take advantage of tax benefits – such as depreciation and negative gearing on an investment property – to get your money working for you.

Bear in mind though, the amount of equity you can access will depend on the lender’s valuation – and this could be lower than you expect. Many lenders also place restrictions on equity home loans because of the risk of the lump sum released not being used for its intended purpose. Also, because you will be paying off this amount over the term of the loan you might end up paying more interest then you would have paid if you had taken out a shorter loan, such as a personal loan over five years. uno can help you work out if it is the right option for you.

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What you’ll need:

  • ID, payslips and bank statements
  • A home valuation
  • Absolute assurance you’re not borrowing to start an underground greyhound racing racket

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