Cash out refinance

What is a cash out refinance?

A homeowner may choose to refinance their existing mortgage in order to access the equity they’ve accumulated in their home as cash.

This ‘cash out’ can be given to you in a bank account, an offset account, or as a line of credit.

While it can be a handy way to access more cash, it can typically extend your loan term, and as a result, increase your overall interest repayments over time.

What is home equity?

This is the amount of your home’s value that you own outright. You can calculate how much you own by subtracting your current loan balance from your property’s total current value.

For example, if your home is valued at $500,000 and your remaining loan balance is $350,000, then your equity would be $150,000.

Equity typically increases through making repayments and if your property’s value increases from the date you purchased it.

If you are refinancing, it’s likely that your lender will organise a professional property valuation in order to determine how much equity you have. However, you can organise an independent property valuation at any time.

What are some reasons to cash out refinance?

1. Complete a renovation or pay for a large sum of expenses
   Whether it’s a home renovation, a new car, or a long-awaited holiday, you typically won’t be required to pay high interest rates.
   While you can use a credit card or personal loan to help you with major expenses, the interest rates are typically much lower if you cash out equity in a home loan refinance.
2. Invest in another property
   If this is something you’ve been thinking about for some time, then cashing out your equity could help you get the money you need for an investment property deposit.
3. Invest in the stock market
   You may have also been considering investing in stock market shares, so a cash out refinance could also be a helpful way to do this.
4. Pay off other existing debts
   If you have other existing debts such as credit cards or high interest loans you may need to pay off, then you could choose to consolidate these debts within your home loan. They will likely be under a lower interest rate. Read more about consolidating debts here.

How does cash out refinancing work?

It’s much like a general home loan refinancing process, but here’s a general overview to give you the right idea:

1. Establish exactly what you need the cash for.
   Your lender is likely to ask you what your plans are before they give you the cash.
2. Figure out how much equity you have.
   You can do this by asking your current lender to calculate it for you and send you a property report.
3. Research and compare home loans with Lendi.*
4. Apply for your new home loan.
   A property valuation typically occurs at this stage by a professional property valuer.
5. Complete a mortgage discharge form.
   If you end up switching lenders, then you’ll need to complete a mortgage discharge form and send it to your previous lender.
6. Prepare for settlement.

Things to consider before cash out refinancing

Here are some important factors to consider when you’re figuring out whether refinancing will suit you and your situation:

• The comparison rate
  This is the estimated total cost of the loan, and takes into account the interest rate, loan term, and fees. It’s important to compare comparison rates for any product you’re considering against your current loan to ensure you’re getting a good deal. A comparison rate gives you a more accurate idea of how much your home loan will cost, compared to just looking at interest rates.
• Fixed or variable
  Is the new product a fixed rate or variable rate product? And does the lender offer the ability to split the loan into half fixed, half variable?
• Break-fees
  These are the fees you’ll need to pay to your existing lender to break your mortgage contract. They typically only apply for breaking the terms of a fixed rate home loan (e.g. by refinancing before the end of the fixed period).
• Any new fees
  These are any setup, administrative, valuation, or ongoing service fees charged by your new lender.
• Loan term
  The longer the loan term, the more interest you could end up paying, so switching to a loan with a shorter term could help you save. Additionally, you need to consider whether cashing out equity from your current mortgage makes long-term financial sense for you.
• Payment frequency
  It’s important to check that your repayment frequency aligns with your cash flow to ensure you’re not hard-pressed to manage your repayments.
• Additional features
  Different loans come with different features, such as offset accounts and redraw facilities, which can add flexibility to your loan, and even help you minimise interest repayments. For this reason it’s important to know you’re not foregoing any features that you value when switching products.
• Lender’s Mortgage Insurance (LMI)
  If your loan to value ratio is over 80% then you may need to pay Lender’s Mortgage Insurance again with your new lender, as it’s not typically transferrable.

Are there any downsides to cash out refinancing?

1. You will typically owe more
   As expected, when you choose to access equity from your home, the amount you will owe on your home loan afterwards will increase. Make sure you’re prepared to budget for this in the long term.
2. You may be drawn into old bad habits
   Impulsive spenders should also be careful not to rely too heavily on using their equity to repay other debts (e.g. credit cards).
3. You may be required to increase your mortgage repayments or loan term
   When you cash out part of your equity, you are increasing the amount you owe on your home loan. This could require you to increase your monthly repayments or opt for a longer loan term. However, increasing your loan term typically results in paying more interest in the long term.
4. Be aware of break costs for leaving a fixed interest home loan
   Fixed interest home loans typically have break fees that come with cash out refinancing.
   Figure out how much the break fee will be before refinancing your fixed rate home loan to make sure it’s going to be worthwhile for you.

Compare options with iSelect & Lendi*

While it can be a daunting task, comparing cash out refinance options is easier than you think with Lendi. iSelect has partnered with Lendi to help you compare home loans from a range of lenders and help you switch.* Get started from 25+ lenders online, or give Lendi a call on 1300 186 260 (8:30 – 10:30).