Question regarding mortgage refinancing vs using home equity

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

 

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.

 

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?

 

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

 

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.

 

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

 

It's your own money when you sell the property

 

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.

 

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?

 

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.