Need home loan advice

[Hamingja]

I have a mortgage with about 350k left

my property has sky rocketed in the last 6 months upto 550k.

I want to use the equity to do some renovations but a year ago I signed on for a fixed rate loan for 4 years.

what are my options and how much would it cost to change

You can just get a second loan with the same bank for whatever you need for the renovations and don't touch the fixed loan. Probably need to do some negotiations with product minimums / interest rate but it would be a pretty hefty break fee otherwise I'd imagine.

 

[Scottroo]

You can just get a second loan with the same bank for whatever you need for the renovations and don't touch the fixed loan. Probably need to do some negotiations with product minimums / interest rate but it would be a pretty hefty break fee otherwise I'd imagine.

unfortunately my loan is already split as a garuntore loan

 

[Hamingja]

unfortunately my loan is already split as a garuntore loan

As in someone has gone guarantor for you? Release that s**t if you have $350k loan against $550k property, shouldn't need it anymore at that LVR for a standard residential property

 

[juss]

Can someone answer this for me around equity. A mortgage broker was telling me that the equity accessed is when refinancing, you basically set up a separate portion of an interest only loan (let's say $30k equity for example), and then that just sits as an offset until you withdraw it, and then you had that 30k interest only loan to pay off.

Is that how it works? Using equity still leaves you with however much you take out as a loan you need to pay back?

 

[Halloween Jack]

unfortunately my loan is already split as a garuntore loan

If the bank values your property at $550k, and your loan is $350k, they can release the guarantee. Also, as a general rule you could get a new loan of $90k to fund the renovations. (this is worked out as $550k x 80% = $440k then minus the $350k current balance = $90k)

this is of course subject to meeting other bank lending criteria such as income, credit history, purpose of funds etc.

 

[Halloween Jack]

Can someone answer this for me around equity. A mortgage broker was telling me that the equity accessed is when refinancing, you basically set up a separate portion of an interest only loan (let's say $30k equity for example), and then that just sits as an offset until you withdraw it, and then you had that 30k interest only loan to pay off.

Is that how it works? Using equity still leaves you with however much you take out as a loan you need to pay back?

yes, if you take equity out it leaves you with an extra loan you need to pay back. However, it can be P&I, does not have to be interest only. Interest only loans are at higher rates, which is not an issue if you have it fully offset, but if/when you draw the cash you are paying a higher rate unless you convert to P&I.

Also, when the broker says refinancing be aware that you don't necessarily need to move to another bank to access equity. It can be done by staying at the same bank, which can be cheaper depending on rates.

Two final points, 1) don't access equity unless you need the cash. I see people do it for the sake of getting equity and end up blowing the cash. 2) if you are accessing equity to fund lifestyle, you need to carefully consider what you will do when the equity runs out.

cheers,

 

[juss]

yes, if you take equity out it leaves you with an extra loan you need to pay back. However, it can be P&I, does not have to be interest only. Interest only loans are at higher rates, which is not an issue if you have it fully offset, but if/when you draw the cash you are paying a higher rate unless you convert to P&I.

Also, when the broker says refinancing be aware that you don't necessarily need to move to another bank to access equity. It can be done by staying at the same bank, which can be cheaper depending on rates.

Two final points, 1) don't access equity unless you need the cash. I see people do it for the sake of getting equity and end up blowing the cash. 2) if you are accessing equity to fund lifestyle, you need to carefully consider what you will do when the equity runs out.

cheers,

Planned to refinance anyway for the purposes of getting a better deal, and in the process was planning to access equity for the purpose of buying an investment property. But that may be 6 months away so unsure whether it's better to access now and just hold, or not access it and refinance again later, but that might cost me more due to breaking fixed rate costs?

 

[Halloween Jack]

Planned to refinance anyway for the purposes of getting a better deal, and in the process was planning to access equity for the purpose of buying an investment property. But that may be 6 months away so unsure whether it's better to access now and just hold, or not access it and refinance again later, but that might cost me more due to breaking fixed rate costs?

If you are refinancing anyway, easier to do it now. But if you do it later, don't worry about breaking fixed costs. You just set up the refinance portion as one loan, and the equity as a seperate loan. That way, the first loan stays as fixed and is not broken. In fact, if you are accessing equity for investment you should split the loans anyway, as one will be for owner occ use and the other for investment. Easier to work out the interest to claim on tax.

 

[PieLebo87]

Planned to refinance anyway for the purposes of getting a better deal, and in the process was planning to access equity for the purpose of buying an investment property. But that may be 6 months away so unsure whether it's better to access now and just hold, or not access it and refinance again later, but that might cost me more due to breaking fixed rate costs?

As Halloween Jack said, do it as part of the refinance and keep it separate from your initial loan amount to allow for you to differentiate at tax time.

Dip into the equity enough to have a 20% deposit + stamps available for when it comes time to purchase the investment down the track. That way your investment purchase is more seamless and you don’t need to cross collaterise your securities with the bank.

The equity you take out, keep that loan as variable so you can offset and not pay interest, or pay it back into that loan account and redraw when it comes time to buy. If you then wanna fix it later after you buy, you can.

 

[juss]

How hard is it to refinance now and then access equity later? Not quite getting the valuation I want but going to do some works to raise it. Need to refinance in the next month but if I want to access the equity say in January is that a whole other refinance? I intend to fix for 3 or 4 years but don't want to lock myself out of accessing equity.

 

[PieLebo87]

How hard is it to refinance now and then access equity later? Not quite getting the valuation I want but going to do some works to raise it. Need to refinance in the next month but if I want to access the equity say in January is that a whole other refinance? I intend to fix for 3 or 4 years but don't want to lock myself out of accessing equity.

Each time is it’s own full application, credit check and verification. Whether you refinance, or simply increase your home loan, it’s the same amount of work you have to go through and documents you need to provide.

Bear in mind if the equity isn’t there now, it most likely won’t be there after a few months, regardless of the reno works you do. Bank valuations are always on the lower end to be safe.

As mentioned previously, after refinancing, and fixing your home loan, you can still access equity via a separate, new loan account.

 

[Scotland]

Not all valuations are equal.

 

[PieLebo87]

Not all valuations are equal.

Pretty much majority of bank valuations are unders.

 

[Scotland]

Pretty much majority of bank valuations are unders.

Maybe so, but they aren't identical. I went through this recently. One bank offered a valuation I wasn't happy with so I went to another and the valuation was much higher.

 

[PieLebo87]

Maybe so, but they aren't identical. I went through this recently. One bank offered a valuation I wasn't happy with so I went to another and the valuation was much higher.

Yeah understood, but guarantee you still wouldn’t even sell your property for the amount the higher valuation came back at.

 

[Some Idiot]

One thing that's been bugging me about this pandemic affected economy is the banks handing out home loans like candy. People are getting houses with a 5% deposit on low incomes based on spendings histories that are significantly lower than normal due to the pandemic. At what point do we start worrying that Australia could be heading to a 2008 style crash due to these risky mortgages?

 

[Sqotty from office works]

One thing that's been bugging me about this pandemic affected economy is the banks handing out home loans like candy. People are getting houses with a 5% deposit on low incomes based on spendings histories that are significantly lower than normal due to the pandemic. At what point do we start worrying that Australia could be heading to a 2008 style crash due to these risky mortgages?

Just watched "the big short,"

It's exactly where we are today.
Over committed fools disaster ready to hit.
Any economic downturn and they're dead.
Pregnancy
Rates rise.
Loss of overtime.
Loss of job.
Downturn in economy.
Worldwide disaster.

 

[PieLebo87]

One thing that's been bugging me about this pandemic affected economy is the banks handing out home loans like candy. People are getting houses with a 5% deposit on low incomes based on spendings histories that are significantly lower than normal due to the pandemic. At what point do we start worrying that Australia could be heading to a 2008 style crash due to these risky mortgages?

Banks are definitely not handing out loans like candy. Don’t get where you get that idea from. It’s near on impossible to get a home loan unless you’re on extremely good coin. Plus the fact the affordability rate used in the application is well above the actual interest rate the applicant will be paying to account for any increases to home loan rates.

 

[Some Idiot]

Banks are definitely not handing out loans like candy. Don’t get where you get that idea from. It’s near on impossible to get a home loan unless you’re on extremely good coin. Plus the fact the affordability rate used in the application is well above the actual interest rate the applicant will be paying to account for any increases to home loan rates.

Just anecdotal - I know a few people on low income that have gotten home loans on the back of saving ~75% of their take home pay in the past year. Prior to pandemic conditions they were saving next to nothing but the lenders aren't looking that far back. From memory the loans are with banks like ING, ME, Citibank etc rather than big 4 banks if that makes a difference.

 

[Hamingja]

It's been easier to get a loan in the last 12 months or so, provided your employment hasn't been affected by covid. Low interest rate environment so banks were able to drop their sensitised assessment rates from 7-7.5% to 5-5.5%.

Harder to buy a house as there is no supply in the market.

 

[PieLebo87]

Just anecdotal - I know a few people on low income that have gotten home loans on the back of saving ~75% of their take home pay in the past year. Prior to pandemic conditions they were saving next to nothing but the lenders aren't looking that far back. From memory the loans are with banks like ING, ME, Citibank etc rather than big 4 banks if that makes a difference.

Regardless of their actual expenses in the last 12-18 months, the bank application will always treat their minimum general living expense at the poverty line of the household expense measure based on the income range. You can’t cheat the system. Even if they actually are spending $500 a month right now on a $50k salary, the HEM will ensure the general expenses are recorded at a higher amount to that to account for changes to spending habits.

 

[HirdsTheWord]

Just watched "the big short,"

It's exactly where we are today.
Over committed fools disaster ready to hit.
Any economic downturn and they're dead.
Pregnancy
Rates rise.
Loss of overtime.
Loss of job.
Downturn in economy.
Worldwide disaster.

What's going on is a little different to the GFC. Even though the visuals are the same. Housing prices in Australia are a systemic issue that requires Government to act, which they never do.

What we should be worried about in the short term, or at the least the people who just took on a big mortgage is rising inflation, the only way to deal with rising inflation is rising interest rates.

 

[Gigantic]

Yeah, we're not going to have a GFC disaster in Australia.

The issue for the US during the GFC was the multitudes of subprime lenders giving out loans like candy in parallel with:

• banks packaging those mortgages
• then it getting repackaged into tranches
• credit rating agencies misappropriating it and the risk
• wide use of off-balance sheet entities
• hedge funds betting on and against the market
• regulators not being able to control the market or industry because they didn't really have oversight of it

We don't really have that melting pot of shady practices nor the exposure to CDOs here in Australia. And subprime lenders are fairly contained here too.

For me, our housing market issues are far simpler. There's the affordability of repayments once interest rates hike as said above. And then there's also the housing affordability question for first home buyers.

 

[Upgrayedd]

Quick Query

I have a Home loan with a former partner, 50/50 split

House value is 400k
Owe 265,000

Im exploring purchasing a small unit/Villa for myself end of the year upto about 300k. with the attempt of drawing equity from my half of the property, Now what are the hurdles? Former partner and I are on good terms, Would it save a lot of headaches to push to sell the property? with rental income ect. It's costing me on average about 440 a month to service the loan renting it out so thats not a massive issue and I wont have an issue finding tenants in the next 3/4 years

 

[Nothing]

Quick Query

I have a Home loan with a former partner, 50/50 split

House value is 400k
Owe 265,000

Im exploring purchasing a small unit/Villa for myself end of the year upto about 300k. with the attempt of drawing equity from my half of the property, Now what are the hurdles? Former partner and I are on good terms, Would it save a lot of headaches to push to sell the property? with rental income ect. It's costing me on average about 440 a month to service the loan renting it out so thats not a massive issue and I wont have an issue finding tenants in the next 3/4 years

Eventually one of you will want out of the property, it might be now (for you). Depending on the tax considerations selling it might be the best outcome. Even on the best of terms, your goals will continue to diverge so make the break now.

I've had 3 (younger) clients all buy property with what became former partners. All had the idea they could retain it with sharing the loan. All of that ended when one of them ended up with a new partner and they wanted to buy a property together.

To use the equity from the home, most banks would want her financials and mortgage over both properties. Otherwise, you could look to change to tenants-in-common and split the loans.