Australia’s housing prices rose as much as 10.7 per cent over 2016 and are predicted to hike up an average of five per cent over 2017. Despite that, many home-owning retirees are still “cash poor” and without a regular income or source of money to maintain a reasonable and desired standard of living. Before the 1990s, most retirees invested their income into their property and other assets rather than superannuation, resulting in a lack of available cash to now enjoy their retirement.
Refinancing your home and borrowing from equity could be the most cost-effective way to free up some wealth for value-adding renovations, assisting a family member to buy their own property or take that much-needed vacation in your retirement years.
While a mortgage broker might seem the idea way to look at your options, Mandeep Sodhi, CEO and Founder of HashChing — Australia’s first online home loan marketplace — strongly recommends that you undertake preliminary research before dealing with a broker.
He says that not only will a knowledgeable broker let you know realistic timeframes and fee structures, but will ascertain particulars such as discharge and hidden fees for setting up a new loan and opting out of an existing one — which sometimes can be up to five per cent of your loan.
They will also be able to detail each loan product’s features that are available. Elements such as readily available ATMs, offset accounts or free redraw facilities, “no negative equity guarantees” are all factors that brokers will advise you on.
“Ensure you conduct a thorough background check on your broker and don’t be reluctant to question why they might be pushing a higher rate loan — is it because they are getting a larger commission?” Sodhi says.
“It’s important for consumers to ask their broker what commission they are getting. They are required to disclose this and could reveal bias behind their product recommendation.”
You will also need a professional broker to help you determine the value of your property, what equity is available and which is the best option, taking in your whole financial circumstances and lifestyle goals.
Here are some of your options:
Refinancing your home
Refinancing gives you the advantage of switching to another lender or another loan product which has lower rates and fees. This may result in lower monthly payments and reduced overall interest. It could easily lead to having your primary mortgage paid off faster and access to cash to do the things you have been dreaming of.
It can also allow you consolidate debts, which can save money and provide the chance to maximise the value of your property as an asset.
However, you will need to check your mortgage contract. There are often additional fees involved, including exit fees from your existing finance, upfront fees to your new finance, insurance, administration and stamp duty costs. Additionally, some refinancing packages require an income for you to be eligible – tricky if you have already retired.
Refinancing your home and borrowing from equity could be a cost-effective way to free up wealth
The most popular form of equity release in Australia, a reverse mortgage unlocks your equity so you can access up to 40 per cent of your home’s value (depending on your lender’s terms).
No income or payments are required throughout the duration of a reverse mortgage and it’s considerably more flexible than other financing options because you can receive a lump sum, ongoing income stream or a cash reserve. The full repayment isn’t due until the last loan holder dies or moves into aged care, the house is sold or in a state of total disrepair.
A second mortgage offers you a maximum amount across an agreed upon term using your house as collateral against the loan. It’s very similar to your primary mortgage in that it offers you a lump sum payment with monthly set repayments over a fixed timeframe.
The advantage of a second mortgage is that you pay off your principal as well as interest over the course of the loan. However, in addition to the extra expense, you are essentially putting your home on the line.
A home equity line of credit (HELOC) is an adjustable loan that works much like a credit card with monthly repayments and the limit that you can borrow has already been established by your lender.
There’s no loan term and no need for pre approval, which is especially handy when you need fast cash and the interest is only on the withdrawal amount.
A HELOC is most suited to those who are meticulous in their repayments and can prioritise debt reduction. The lending institution can terminate the loan early, which can pose problems for those who don’t have immediate access to the full repayment amount.
A mortgage broker can help you work out which option is best for your needs, while saving you time and, ideally, money.
In addition to 25% Home Insurance cashback*, HashChing is giving WYZA readers an additional $200 cashback on successful loan settlement through HashChing. Use the promotional code: WYZA200 for additional $200 cashback on loan settlement.
*HashChing will pay 25% of the premium (excl. GST and taxes) for your first year’s home insurance within 3 months if you buy it from CGU using the link we’ll email to you when your loan is approved. Offer ends 31st August 2017.