If the value of your property has gone up in value, you are able to increase your loan and seek a cash out in the increase equity amount, subject to servicing and banks approval.
Every bank has a different appetite in term of how much equity they will allow you to take out, but generally you are able to take out up to 80% of the properties current increased value.
How does it work?
Say you bought a property in 2019 for $600,000 and you took out an 80% LVR loan of $480,000.
Fast forward to today, and the same property is now worth $900,000 and your original loan has reduced to $440,000.
Subject to servicing and credit approval.
You can cashout your equity up to 80% LVR of the new value $900,000 which makes it a $720,000 loan, minus your current $440,000 loan. This gives you a cash total equity of $280,000.
What can you use the equity/cash out for?
Any purpose that’s acceptable to the banks and their lending guidelines, here are some common examples
- Renovations
- Purchase a car
- Pay off debt/ pay off credit cards
- Deposit on another property purchase
- Buying another property outright
- Shares
- Investments- Managed funds
- Holidays
- Weddings
Any restrictions on the cash out or equity?
Generally, no, unless you need the bank to pay off a certain debt.
The interest rate and condition of the loan would be the same as your standard home/investment loan- unless the purpose is used for commercial or business purpose.
However not all banks are the same, some may have a maximum amount they will allow you to cash out example Max $100,000. Whilst some another are ok with a $250,000- $1,500,000 cash out/equity.
Are cash out/equity the same for each bank?
No. Each banks have their own policy and appetite on how they treat and accept cash out/equity.
- Max LVR
- Max amount
- Different range of acceptable purposes
- If they will control the cash out/equity or happy to hand it over as cash
- Different valuation figure
Example: Sam and his wife Rebecca decided they wanted to upsize from their current home and big a bigger house, but they wanted to keep the current unit and convert it into an investment property instead of selling for tax reasons, wealth creation and the timing of the property market was a buyers’ market, so not the right time to sell.
However, they had one issue, Deposit. They lack the 20% cash deposit.
Current unit’s home loan Balance was: $300,000.
Their current unit is worth $970,000.
They wanted to buy a House in the same area for around $2,000,000. They had only $35,000 cash in their bank account as savings, which was short of the required 5-10% deposit required for auction.
They approached their bank, who advised they can offer them the new loan to buy the $2,000,000 house but they needed to cross securitize the unit and the house together with the same bank. Sam and Rebbeca did not understand the negatives of cross securitization and was a bit comprehensive to go to auction given they only had $35,000 cash and a conditional pre-approval which end of the day can be a useless piece of paper.
They approached us for a second opinion. We advised against cross securitization.
We refinanced their current home to a new lender at a cheaper rate savings them $5,200 a year in interest and most importantly we were able to cash out $476,000 equity from their current unit at an 80% LVR.
So, they now can go to auction confidently knowing they have access to $476,000 in their bank account as savings. Nothing beats having cash.
Using this $476,000 cash equity as deposit for their $2,000,000 home purchase. Enough for the 20% Deposit and Stamp duty and have the option to provide this new loan the same bank or to a different bank.