You may have heard how refinancing your mortgage after a few years is a handy way to get yourself unstuck from a financial rut. But did you know that it can also offer opportunities to help you make more money in the future?
A recap – what is refinancing?
The simplest way to describe refinancing is switching your current home loan for another one. Many Australians choose to refinance their home loans in order to get a lower interest rate and save money on their mortgage repayments, or to access home loan features and benefits that can provide extra flexibility and value.
One extra benefit that can come from refinancing is accessing the equity in your property. Your equity is the current value of your property, minus the amount still owed on your mortgage. Making principal and interest mortgage payments can increase your equity, as can making extra repayments.
When you refinance, a valuer will often assess your property’s current value. If your home is located in an area that has seen prices rise in recent years, you may discover that you have more equity available in your property than you realise.
How can equity help me?
Equity in your property can be used as security when you apply for credit, a lot like the deposit you use to apply for your first home loan. It’s not uncommon for a lender to accept up to 80 per cent of your available equity as “usable equity” for securing a loan, which could provide you with benefits in the future.
There are a couple of ways you could access your equity and get cash out from your home. You could borrow extra money when you refinance and access this cash as a lump sum. Alternatively, you could apply for a line of credit, which functions much like a credit card with a maximum limit based on your equity, so you have the flexibility to borrow smaller sums when you need them.
How can getting cash out from my equity today help me make more money in the future?
In the past, some borrowers have used cash from the equity in their homes to borrow money to invest in shares, or even to buy a second investment property. However, these strategies can be risky, and with Australia entering it first recession in decades, it may be worth considering some alternative options.
By accessing your equity, you may be able to pay for renovations or extensions to your home. Fixing up the bathroom or the kitchen, or extending the property to add another bedroom, could not only make your home more liveable in the short term, but help to further increase its value. This capital growth could pay off if you were to sell the property in the future, though it’s worth being careful not to over-capitalise when renovating.
You may also be able to use your home equity to help you start or expand your own business, such as by taking out a loan or line of credit to purchase tools, equipment, or vehicles. Income from your expanded business could help to secure your financial future, though there’s no guarantee that your business will be successful – keep this risk in mind before you consider using your home equity.
There’s also other risks involved. Borrowing more money means your mortgage may take longer to pay off and cost you more in total interest charges. To get a better idea of whether refinancing to get cash out from your home could make sense in your financial situation, consider contacting a mortgage broker or financial counsellor for advice.
Disclaimer: This article contains general information only and is not intended to be used as personal advice.
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