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What is Equity Release?

Find out more about your options for accessing the equity in your home for a variety of purposes with Savvy.

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, updated on August 8th, 2023       

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If you’re in a position to draw on the equity you’ve built in your home over the years, it’s important to know how you should go about doing it and what it may mean for your personal financial situation. Read more about what equity release is and compare your options for doing so with Savvy.

What is equity release in Australia and how does it work?

Equity release is simply the act of withdrawing from the overall equity which has been established in your property. This is calculated by subtracting the amount owing on your mortgage from the value of your home, which increases over time as you pay it down (as well as with increases in property value). There are a number of different ways you can release equity from your home loan, which include the following:

Home loan top-up

A home loan top-up is possible if you’ve grown a suitable amount of equity in your home. You can receive a top-up on your mortgage by applying to your lender and requesting funds to be added to your outstanding balance, after which you can make use of them however you wish (although part of this application process will involve outlining your intended usage to your lender). The major advantage of this type of finance is that it’s inexpensive compared to applying for another loan outright, with fewer fees and an overall smoother process.

Alternatively, many borrowers will take out a line of credit loan, which allows you to borrow against your equity and withdraw funds whenever you like. You’ll only be required to pay interest on the amount you use, also, so you can avoid having to take out a single lump sum and begin repaying it with interest immediately even if you don’t end up using all of it.

Reverse mortgage

Unlike top-up loans, reverse mortgages are restricted to borrowers aged 60 and over, typically those who have paid off their home loan in full. Another area in which these differ from top-ups is how they can be paid to you, as you can receive reverse mortgage payment in the form of a lump sum, consistent income stream, a line of credit or a combination of all three.

You won’t have to make repayments towards your debt, as it accrues by subtracting from your equity, which is then repaid when your home is sold (either by you or your estate when you pass away). In terms of what the maximum equity release is, you can generally access 15% to 20% from the age of 60, with roughly 1% added to each year older than that you are.

Home Equity Access Scheme

A slightly different option when it comes to accessing equity, the federal government’s Home Equity Access Scheme allows eligible borrowers to receive a recurring fortnightly loan payment, which can be used to boost their income already received by the age pension. In terms of what the maximum equity release here is, you can take out up to 150% of the maximum fortnightly pension. This amount is non-taxable and doesn’t come with a required minimum repayment, instead allowing you to pay whenever you like (or when you sell the property). The longer you leave it, though, the more interest and fees will build up.

Is home loan refinancing the same as topping up with an equity release?

No – refinancing is the main alternative to topping up your home loan, as well as the other equity release methods mentioned above. You can do this either with your current lender or a new one, where you can expand the size of your loan to incorporate the equity you’ve built with loan repayments. Unlike these other methods, refinancing involves closing out your current home loan and taking out a new one essentially to pay off your old one for a particular purpose (in this case to increase the size of the loan).

If you’re submitting your refinance application to your current lender, the process can be a quick one, as they have all of your major documents and banking details on file, as well as the power to close and open new accounts promptly. Refinancing to a loan with a different lender will take more time, as this follows the same process as a standard home loan application.

A key benefit of home loan refinancing is that it not only enables you to access your home equity but also secure other features you may not have had available to you on your original home loan, such as an offset account, redraw facility or simply a lower interest rate and fees. Each of these can make a significant difference to your home loan repayment experience, so it’s an option worth considering. Fortunately, you can compare a range of home loan offers all in one place with Savvy today.

What can you use home equity for?

The pros and cons of equity release

PROS

Access to funds you wouldn’t have otherwise

Even without a massive amount of savings, you can boost your available funds and bring your goals within reach by drawing on equity.

Simpler, less strenuous process

Topping up your current home loan is often a less complicated and costly process than applying for a new loan.

Can be used to increase the value of your home

If you’re conducting renovations, you can increase your home equity by improving its overall value.

CONS

Increased debt and interest costs

Your loan will end up costing you more in interest and will likely take longer to repay with equity taken out.

Reducing the ownership in your home

If you’ve paid off your home loan and then decide to access your equity, you’ll no longer own it unencumbered.

Risk of home value decreasing

You could potentially increase your debt even further if your home drops in value after you’ve withdrawn from its equity.

Common questions about what equity release is in Australia and how it works

Can I top up any type of loan?

No – if you’re currently repaying a fixed rate home loan, you won’t be able to increase the size of your mortgage with equity. If you’re in this situation, you’ll either have to pay an early exit fee to break the contract or simply wait until the conclusion of your fixed rate period and top up your variable rate home loan.

What happens with equity release on death?

What happens with equity release in the event of your death is generally resolved by the sale of your property. As mentioned previously, your equity debt is covered by the sale of your property whether you die or not under a reverse mortgage. This is generally the case with other methods of accessing equity, such as home reversion, where a portion of the sale price goes to the third party who purchased part of your home equity.

How much of my equity can I borrow?

Lenders will generally enable you to borrow a maximum of 80% of the value of your home minus your outstanding debt, which is known as usable equity. For example, if your home was worth $700,000 and you have $250,000 remaining on your home loan, you’d have $450,000 in home equity. However, if you wanted to use that equity, you’d generally only be able to access $310,000 ($700,000 x 80% = $560,000).

How do I increase the equity in my home more quickly?

By making additional repayments towards your home loan, you can reduce your loan debt at a faster rate, increasing your home equity as a result. This can also be achieved via a mortgage offset account, which cuts down on your debt as you deposit into it and reduces your interest in the process.

What are the risks of taking out a reverse mortgage?

A reverse mortgage may impact your ability to receive an age pension, so it’s important to assess your situation carefully and consult your accountant before opting for one. Additionally, because reverse mortgage interest compounds, your debt can grow quickly and become difficult to manage. It’ll also reduce the inheritance received by your beneficiaries in your will, as a portion of the sale of your property will go directly to your lender.

Am I able to access equity from more than one property at once?

Yes – if you have equity built in multiple properties, you can access as much of it as you like at any given time. For instance, if you didn’t have enough equity in your owner-occupier home to pay for a deposit on a new investment property, you could use the equity from another of your investments to make up the difference.

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