Cash Out Refinancing on Home Loans

What is cash out refinancing? 

‘Cash out refinancing’ is a pretty straightforward concept. If you’ve been paying off your mortgage for a while, and you’ve built up some equity in your home, you can refinance your home loan to access some of this equity. 

Basically, you tweak your existing mortgage to unlock the equity you’ve stashed away in your home and turn it into actual cash. This cash windfall can go straight into your offset account, regular bank account or even as a line of credit. 

Just keep in mind that while it’s a nifty way to snag some extra funds without taking on more loans, it might take you a bit longer to settle that mortgage tab. So it’s worth considering the pros and cons. 

What are the benefits of cash out refinancing? 

Cash-out refinancing certainly does come with some perks, such as: 

• Consolidate debts – Use cash-out refinancing to roll all those debts into one, making life a little simpler and maybe snagging a lower interest rate. 
• Fund renovations – Spruce up your space with the cash you pocket from refinancing – perfect for those non-structural renovations or repairs. 
• Invest in your future – Cashing out your equity can also give you the space and funds to invest in property, stocks or that long overdue holiday that you’ve been dreaming about. 

How does cash out refinancing work? 

Let’s unravel the mystery of how cash-out refinancing does its thing. Imagine you’re about to embark on a money makeover for your home – here’s how it rolls: 

1. First up, figure out the treasure in your home’s piggy bank – your equity. You can get a ballpark estimate using a property report, but the real deal comes when your lender runs a formal calculation later.

2. Pin down why you want that cash and what grand plans you have for it. Lenders are curious and usually want the lowdown on how you’re going to use the money.

3. Time to put on your detective hat and research the home loans out there. Compare them online or talk to Lendi for some tailored advice.

4. When ready, apply for that new mortgage. A property valuation might also be required.

5. If you’re switching to a new lender, they’ll shoot over a mortgage discharge form to your old lender. 

6. The big finale—settlement day. That’s when the cash from your refinanced mortgage hits the stage!

Helpful tip:

The cash you can get your hands on is tied to the equity you’ve built up in your home. Think of it as a reward for faithfully paying down your mortgage and watching your property value move upwards. The more equity you’ve got, the more cash you can usually access. 

Debbie Shankar

Former Group Content Manager, Lendi

How much money can I get with cash out refinancing? 

Every financial institution has its own rules in this game. Typically, lenders allow you to borrow up to 80% of your property’s value. If your loan-to-value ratio (LVR) crosses that 80% threshold, the cash-out might hit a roadblock. Some lenders might still roll the dice, letting you go with the cash even with less than 20% equity – but they might throw in a side dish called Lenders Mortgage Insurance (LMI). 

Keep in mind this whole cash-out refinancing adventure usually takes about 2-4 weeks, depending on your lender’s rhythm, your situation, and how fast you can hustle those required documents. 

How does it affect home equity? 

Let’s start by defining home equity. This is the chunk of your property’s value that you truly own, no strings attached. Take your home’s current market value and subtract the outstanding loan balance, and that’s your equity. 

When you opt for the cash out money move, you’re essentially tapping into that equity piggy bank. The cash you pocket from the refinancing deal gets subtracted from your home’s equity stash. It’s like taking a withdrawal from the bank of your house. So, if you’re not careful and go all out with the cash-out spree, your equity can take a hit. 

What are the risks of cash out refinancing? 

You’ll want to look over your financial situation before you rush into the refinancing process. Depending on where you fall on the risk barometer, you might want to think twice about your options. 

Low Risk

High Risk

Strong Home Equity It’s usually a good sign if you’ve built up a lot of equity in your home. It’s like having a safety net: the more equity you’ve built up, the more cushion you have against potential risks. Low Debt-to-Income Ratio Keep that debt-to-income ratio in check. If it’s on the lower side, it means you’re not drowning in debt compared to your income. Stable or Rising Income Got a steady income stream or maybe even a pay rise on the horizon? That’s also good news. A stable or rising income might help handle any increased repayments (though you’ll still want to crunch the numbers!).

Low Home Equity If your equity game is weak, be cautious. Low home equity means less financial wiggle room and higher risk. High Debt Got debts piling up? It’s a red flag. High existing debts make the cash-out gamble riskier, like walking a financial tightrope. Bad Market Conditions Market blues can cast a shadow. If the real estate market is not playing nice, it adds an extra layer of risk to your cash-out play.

Where can I find and compare home loans? 

The world of cash-out refinance doesn’t have to be a brain-buster. Thanks to the dream team-up of iSelect and Lendi, comparing your home loan and refinancing options is a breeze. Sort through home loan choices from a bunch of lenders, making the switch a walk in the financial park.