You may have an investment property that you plan to renovate, or it may be your own house. Once the renovation is finalised, it is a good idea to get your property re-valuated. Here’s why:
Let’s say the property’s original value was $1M and your loan is 80% of the value. You just finished with a construction or renovation loan, and added an additional room, refurbished the bathroom and installed a state-of-the-art kitchen. The whole works ended up costing you $100k.
Following the home improvements, it is highly likely that the value of your property has significantly increased, by at least more than the $100k you spent renovating it. Imagine for a moment that a similar property with the same features is valued at $1.2M. Well, if your property is now worth $1.2M and you owe the bank $800k (80% of $1M), that means that now you have equity that you could draw on of $400k, or at very least you decrease your loan to value (LVR) from 80% to 67%
What is equity?
That equity is an asset whether you are using it or not. In fact, even if you did nothing else, you can use this lower LVR to negotiate a better rate with your lender or with another bank. You could restructure your current mortgage and even release some of the equity to fund a new investment property. If this is positively geared (i.e. you are earning more in rents than the mortgage costs), you could earn money from this.
Your broker can help you understand exactly how much equity can be released. Lending institutions require a minimum amount of equity to remain in the property, so this needs to be carefully considered. Your broker should be able to go through the various scenarios involved with the equity release and how to best structure the loan for tax advantages, cash-flow as well as helping reduce your owner-occupied mortgage at the same time.
While some lenders will allow you to have the funds released through a simple application, others may require you to explain how you will use the cash before they will release the additional funds into your home loan account. Using the right lenders will determine when you can apply to release the equity and how much flexibility will you have to fund your next project.
Despite what either your current bank or unqualified friends might tell you, there is no ‘one-size-fits-all’ solution for this strategy. So, it is imperative to get a strategic lending plan and discuss fully your objectives with your broker. By doing so, you will ensure your lending is fit for purpose and aligned with your financial objectives.
Do you have any comments or questions? Get in touch. For further information on construction loans or renovation finance, don’t hesitate to call one of our experts to discuss further. Freephone +61 7 5456 2928, email: [email protected]
