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Question regarding mortgage refinancing vs using home equity

Discussion in 'Property Finance' started by clicli, 30th Aug, 2016.

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  1. clicli

    clicli Member

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    Hi all

    Could someone explain to me the concept/maths behind mortgage refinancing or using home equity (or are they both the same thing?)

    For example, let's say i bought a property two years ago:

    value: 500k
    deposit: 100k
    mortgage: 400k
    lvr: 80%

    Today the property is worth 700k (after valuation). If i want to refinance my home loan, does that mean i can borrow an additional 160k (keeping 80%lvr)

    value: 700k
    deposit: 100k
    original mortgage: 400k
    80% of 700k = 560k
    additional mortgage: 560k - 400k = 160k

    is the maths above correct?

    instead of refinancing, can i withdraw the original capital of 100k and use it to buy a second property? what happens if i withdraw the 100k capital?

    Cheers
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Your maths is correct.

    You can't withdraw the capital as such, but you can access the equity via a new loan with your existing bank, or via a refinance with a different bank.

    Either way a full application is needed, so it's a good time to shop around and see if your current lender is still competitive.
     
  3. clicli

    clicli Member

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    Hi Jess

    Thanks for the reply. Why do i need to take out a loan to access my equity? Isn't it my own money?
     
  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Nope. It's the banks- you're just borrowing it and using your house as security.
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think you have confused yourself. You are talking about loans not mortgages.

    If you borrow $400,000 and you want to increase this to $500,000 you are borrowing an additional $100,000. This isn't your money it is the bank's - you are just borrowing it.
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    no

    equity position is a notional concept.

    You need to take a loan to take the deposit back out.

    The deposit is lost to the lender at settlement of the original purchase

    ta
    rolf
     
  7. dabbler

    dabbler Well-Known Member

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    No, it is property.

    To get money, you have 2 choices....

    1 Sell
    2 take out a loan where the lender then has a right to sell the place if you do not pay
     
  8. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It's your own money when you sell the property
     
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  9. albanga

    albanga Well-Known Member

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    I was going to say, it is definitely your money but to access it without a loan will mean you don't have a house anymore.
     
  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Another way to look at this

    You owe 400 k currently and were assessed and have been provided a loan at that level.

    To take the 100 k back out means your exposure to the bank is now 500 k. And they need to by law make sure that you can actually afford the new loan amount.

    Ta
    Rolf
     
  11. New2prop

    New2prop Well-Known Member

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    Just to extend/ build on the example here, if the loan is interest-only, excess from rent kept in an offset a/c minus the loan repayments also add to equity?
     
  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Money in an offset account is savings, not equity. Equity is the difference between the property value and what you owe. Money in an offset account doesn't actually change how much you owe, it just changes how the interest is calculated.
     
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  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    It can be converted to equity by paying the loan down, creating a new split for the paid down amount, and the reborrow for investment purposes.

    This can be useful for eg where you have a ppor loan and savings in the offset but you want to invest your deposit money in the most tax advantageous way. A simple form of debt recycling

    Ta
    rolf
     
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