Can home equity save you during a difficult financial period?

July 16th 2020 | Categories: Financial Planning | Home Loans & Leveraging Equity |

Home equity is the difference between the value of your property and debt owing on your property. There are various ways you may be able to use your home equity to your advantage, such as using your home equity to buy a second home or in this situation using it to get through a difficult financial period. It’s important to understand all the options available to you when facing financial difficulty so you can make an informed decision on what will be of most benefit to your situation.

In this article we cover:

• Using home equity during a difficult financial period
• How to access a home equity
• Pros and cons of accessing equity
• Other options to consider

Understand how a financial adviser can support you with your need for financial security. Get in touch.

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Using Home Equity during a difficult financial period

Your mortgage may be one of the largest assets or investments you own and can help pave the path towards a financially secure future, however, your mortgage may be able to help you in more ways than you think. If you are facing financial hardship or experiencing a difficult financial period, there are various features that may be built-in or accessible through your loan such as an offset account, redraw account and of course your home equity.

• A redraw account allows you to access extra payments you may have made on top of your loan
• An offset account allows you to build up savings in an account linked to your mortgage, the savings amount offsets the loan total and can reduce the interest rate on the loan.

Both redraw and offset accounts need to be set up and funded in advance with the future in mind and should be heavily considered in your financial plan. If you are currently experiencing financial difficulty and do not already have these set up and funded, they will not have a benefit to you right now. This is where home equity comes in handy.

Most lenders allow you to access up to 80% of your equity. For example, if your home was valued at $750,000, 80% of this is $600,000. You still have an outstanding mortgage of $300,000, so your available equity is $300,000.

Value = $750,00

80% of value = $600,000
_______________________

Remaining loan = $300,000

Available Equity= $300,000

You can choose to access as little or as much as you want from the available equity subject to approval from the lender. The first step in deciding if this is an option for you is to review your current equity. You may find you also have access to more equity than you think if property prices have gone up in your area. Getting a current property evaluation will help you determine this.

You may also be interested in our article using home equity to buy a second home.

Finances are one of the leading causes of stress in Australians, with this pressure only rising due to the Coronavirus pandemic.

In conjunction with research and understanding your options for accessing emergency funds, if you are currently experiencing financial hardship, we recommend you action the following steps:

• Get a clear perspective of your financial picture by creating a budget. You can access our free budget planner here.
• Can any of your insurance policies help you? Some policies may not cover you in the situation of a pandemic, but it is worth reviewing your terms and conditions.
• What can you go without or reduce? Can you turn off any memberships or subscriptions?
• Understand your liabilities.

You can access the action plan for managing financial hardship here.

You can access our full library of Coronavirus resources and tools here.

How to access home equity:

The easiest way to access your equity is by refinancing your current loan, you may find this further benefits your financial position if you are able to lock in a lower interest rate while interest rates are at an all-time low. You may decide to negotiate with your current loan provider or refinance with a new loan provider. You will need to review loan terms on your existing loan as some loans may be locked in for a certain period.

For more information, see our Refinancing Guide.

Pros and cons of accessing home equity

Like all things in life there are pros and cons to most decisions we make, although accessing home equity can bring financial relief and potential benefits it’s important to review the cons too:

Pros:

• Allows you to access money if you need it
• Could grow your home value if used for renovations or to buy a second investment property

Cons:

• Potentially longer loan term
• Potentially larger weekly and overall repayment amount

Other options to consider when facing financial hardship

Although accessing your equity may be a good option for you, under the current environment there are other benefits and options you may wish to consider first.

You may be able to:

• Freeze your mortgage repayments
• See if you are covered in your income protection policy (subject to cause)
• Access a super lump sum
• Be entitled to certain grants and benefits
• Ask for a rent reduction (if impacted by Coronavirus)
• Contact lenders to discuss options around potentially freezing repayments or interest

You may be interested in our articles:

A guide to managing your debts

A guide managing inheritance or a lump sum of money

Ways to reduce your home loan during covid-19

Update on financial support available during the covid-19 outbreak

Is debt consolidation a good idea

If you do decide to access your home equity, we do recommend having a plan to repay the loan faster once you financially recover. A great way to do this is by using your tax return or any lump-sum payments such as super lump sum or inheritance to pay down your loan or simply increasing your weekly repayment.

Discussing your options with a financial planner will ensure you are making the most informed and best decision for you taking into consideration your current and future financial position. They may also be able to suggest additional strategies and will be able to assist you in rebuilding financial security into the future.

Contact us today to discuss your options.  

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What you need to know

This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.