How can refinancing a home with minimal equity become a reality?
Refinancing a home involves moving from your existing home loan to a new home loan. During the process, many lenders allow you to borrow more, provided that your property value has increased and you've paid off enough of your mortgage.
As a rule of thumb, you typically need at least 20% equity build up in your property to qualify for a refinance home loan. However, there many be some niche or specialist lenders that will approve your refinance application with less than this amount.
Keep in mind that it may not be possible to refinance your home loan with no equity.
While 100% home loans are no longer available, there are ways that you can apply for a refinanced mortgage with little equity such as through a guarantor loan.
Read on to find out how you can switch lenders with minimal equity.
The loans below are not 0% deposit or no equity home loans, but allow applications from borrowers with 5 - 10% deposit or equity.
Compare 90 - 95% LVR home loans
Rates last updated January 22nd, 2017.
- ING DIRECT Orange Advantage Loan - $150,000+ (LVR > 90% Owner Occupier)
Comparative rate increases by 0.15% | Interest rate increases by 0.15%
December 12th, 2016
- NAB Tailored Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier)
Comparative rate increases by 0.04% | Interest rate increases by 0.23%
January 16th, 2017
- NAB Tailored Fixed Rate Home Loan - 3 Year Fixed (Owner Occupier)
Comparative rate increases by 0.05% | Interest rate increases by 0.20%
January 16th, 2017
How can I refinance with minimal equity?
- Consider specialist lenders. If you're looking to refinance and you've only built up a small amount of equity in your home, think about refinancing to specialist lenders or building societies. These lenders may have more lenient eligibility criteria when it comes to determining your serviceability potential. If you can demonstrate that you have enough savings, income or assets to service the loan, the lender may overlook the minimal amount of equity that you have.
- Find a guarantor. With a small amount of equity in your existing home, you may want to refinance to a guarantor loan. This can boost your borrowing capacity as the guarantor essentially takes responsibility for servicing the loan if you default.
- Independent valuation. If you can prove that your property has increased in value, then the lender may be more inclined to let you refinance and borrow a larger amount of funds.
- Speak to a broker. When undergoing the refinancing process, it's a good idea to sit down with a broker to discuss your options with a mortgage broker. An experienced broker can draw upon their relationships with lenders to find one that's more likely to review your application. A broker can also negotiate the terms of the refinanced mortgage on your behalf.
- Request a copy of credit file. With a small amount of equity, you present a larger risk to the lender. This is why it may be a good idea to take measures to trim your existing debt and clean up your credit file. If you can show the lender that you make a conscious effort to meet your repayments on time and make extra repayments in the past, then they may be more likely to approve your refinance application.
Equity refers to the portion of your property that you actually own, which can be worked out by subtracting the outstanding loan amount from the market value of the property.
Calculating your equity
For example, if you purchased a home for $450,000 with a $70,000 deposit and five years later had paid off $35,000 from your principal, you'd be left with a principal of $345,000. If your property had increased in value, let's say by 10%, you'd have $150,000 in equity in your home.
How to work out principal remaining
$450,000 (original purchase price) - $70,000 (deposit) = $380,000
$380,000 - $35,000 (amount of principal paid off after five years) = $345,000
10% (value increase) of $450,000 = $45,000
$450,000 + $45,000 = $495,000
$495,000 - $345,000 (principal remaining) = $150,000.
How much equity do I need to refinance?
The amount of equity that you need to refinance will depend on the lender's individual criteria. However, it's important to note that many loans come with a maximum LVR of 95%, which means you cannot borrow more than 95% of the value of your home.
As a result, if you wish to refinance you need to have at least 5% equity in your home. Generally, you need at least 20% equity build up in order to qualify for a refinanced mortgage.
If you've only had your existing home loan for 5-10 years, refinancing may be risky as you may not have built up enough equity to qualify with a new lender and switching lenders may not benefit you financially. This is why it may be important to speak with your accountant or mortgage broker to ensure that refinancing is the right decision for you.
Learn more about the amount of equity that you need to refinance your mortgage.
Why do we need equity to refinance or purchase a property?
Equity is important to a lender because it indicates the amount of risk you have as a borrower. A smaller amount of equity means you own less of your home and therefore means there's a greater chance that if you defaulted on your loan and had to sell your property, the value of the property wouldn't be enough to cover the outstanding principal.
Prior to the Global Financial Crisis (GFC), 100% loans where you needed no deposit were common within the home loan market. However, following the GFC, many banks have tightened their lending criteria as they recognise the importance for borrowers to complete a deposit as it protects the lender in the event that they default on the loan.