MAINTAINING A HOME
Cash out refinancing: What is it?
22 July 2022
A 30-year mortgage can be a flexible instrument for home loan customers with the right knowledge. Consider the possibility of turning your home equity into cash to help pay for expenses such as medical bills or non-structural home renovation costs. You might be able to do this with a cash out refinance on your home mortgage.
How does cash out refinancing work?
Cash out refinancing is a type of mortgage refinancing that allows you to access the equity in your home by taking out a new loan with a higher loan balance than your current loan. The difference between the two loans is then paid out to you in cash.
The process is started by applying for a new loan with a lender. A lender will consider the value of your home, what the funds are to be used for and determine how much more you’re eligible to borrow (if any). Once a loan is approved, upon settlement your old loan is refinanced and the additional amount borrowed is provided to you in the form of cash.
The benefits of cash out refinancing
Here are some of the reasons why you might consider adding to your home loan balance:
- Consolidate debts: If you have multiple debts, refinancing can simplify your finances and free up funds to help you service repayments at a lower rate of interest.
- Pay for home renovations: If you need cash for non-structural home renovations or repairs, cash out refinancing can be a convenient way to access the funds you need.
- Access competitive interest rates: Cash out refinancing may offer you the chance to access more attractive interest rates, which can save you money on your loan repayments.
Example of how cash out refinancing works
You may need to have substantial equity in your home to be eligible for cash out refinancing. Equity is the difference between your property’s market value and the balance of your mortgage.
For example, if your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 in equity. Your LVR in this case is 60% which is below the threshold of 80% needed to make an application. Applications with an LVR of more than 80% are likely to be rejected. If your property has increased in value since you bought it, then you might be able to borrow against those capital gains.
It’s likely you may need to have a good credit score and a steady income to qualify for cash out refinancing. Conditions vary according to the lender so it’s best to speak with a specialist.
Things to consider before you decide to refinance your mortgage
There are a few things to keep in mind when considering a cash out refinance:
- The interest rate on the new loan might be higher than the rate on the existing mortgage.
- When you increase your home loan debt, your loan repayments are likely to increase too. You therefore might need to extend your home loan term, meaning you are required to make more repayments over a longer period.
- There might be a wide range of costs associated with the new loan.
Cash out refinancing can be a great way to access the equity in your home, but it is important to ensure you obtain the appropriate financial advice to ensure you understand the risks and costs before moving forward.
Alternatives to cash out refinancing
While Suncorp Bank does not offer cash out refinancing here are two alternatives to cash out refinancing that we do offer:
- Equity Loan: An Equity Loan gives you access to savings that you can use for any purpose. It’s similar to cash out refinancing but instead of cashing out the original mortgage, you apply for a new loan and add the balance to your existing mortgage.
- Add loan: An Add Loan increases your existing loan account and can only be completed on a variable home loan. If you have a fixed rate loan, you would need to break-off the fixed rate which could incur penalty fees. An add loan will increase your current repayment amount, but your remaining loan term, and loan type remains the same.
Talk to a Suncorp Bank home loan specialist
Although Suncorp Bank does not offer cash out refinancing, it may be a good way to get some extra cash to pay off bills, make home improvements, or take a much-needed holiday. But it’s important to weigh the pros and cons before you decide if this type of refinance is right for you.
If you’d like more information on refinancing your home loan, one of our lending experts can help answer your questions. All home loan consultations are 100% obligation-free.
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Home Loans are provided by Suncorp-Metway Ltd ABN 66 010 831 722 AFSL No. 229882 Australian Credit Licence 229882 (“Suncorp Bank”) to approved applicants only. Fees, charges, terms and conditions apply and are available on request.
The information is intended to be of general nature only. Subject to any rights you may have under any law, we do not accept any legal responsibility for any loss or damage, including loss of business or profits or any other indirect loss, incurred as a result of reliance upon the information. Please make your own enquiries.