Utilising the equity in your property
With the property market performing the way it has over the past 12 or so months, many homeowners find themselves in a much stronger equity position with options available for further investment.
The main thing your options swing on is a bank valuation of your property to determine how much equity is available to you. Note, whilst a Real Estates Agents appraisal is useful if you are thinking of selling, it will not be relied on by the bank who require a valuation report from a qualified valuer.
So how does it all work? Let’s assume that we’re working to an 80% loan to value ratio (LVR) scenario. Let’s say you bought your property for $1mil, and borrowed 80% of that value so you have a loan of $800k. In reality it’s likely some of this amount has been repaid, however we’ll assume not to keep things simple.
If you get your property revalued by a bank’s valuation firm and it comes back at $1.3m, you’re essentially able to borrow 80% of the additional value in this case being 80% of $300k or $240k. Of course this assumes that income is sufficient to service the repayments on the additional debt.
So what can you use the money for? The general terminology used for this is ‘cash out’ and different lenders have varying thresholds depending on their policy around how much you can cash out and what the money can be used for. A common scenario is that banks will allow cash out up to a certain amount without verification of what the funds will be used for, then above that amount will require verification.
Let's look at some common cases;
Using the money as a deposit for an investment property: In this case the funds will be drawn on at settlement of the new property or made available to you prior and the bank will want to see the contract of sale. Note you’ll need a pre-approval prior to ensure you can afford all the new debt, being both the cash out and the new investment loan.
Renovations: This includes renovations plus things like a pool. Commonly a bank will not require verification up to say $200k, however for major works or structural works will require building plans and costs.
Other investment: Borrowing money for investment purposes such as to purchase shares in a managed fund. If above the threshold banks will want to see details of assets to be purchased and in some cases a letter form a financial advisor or similar
Other: The ability to utilise cashout is quite broad and can also be used for things such as vehicles, business investment or debt consolidation, assuming the amount you borrow is under the lenders threshold.
