Refinancing a home loan without equity
If your home loses value and you're stuck in negative equity it gets hard to refinance your mortgage.
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If you haven't paid off much of your mortgage and then property prices drop it's very hard to refinance or sell with negative equity. Read on to learn what refinance options you have.
Equity, negative equity and refinancing
Your equity is how much of your home you actually own. It's the value of the property minus any mortgage debt you still owe.
Negative equity occurs when you only own a small portion of your home and then your home loses value. This can happen during a property crash or market downturn, or if your property is damaged in some way.
Refinancing is when you switch from your old mortgage to a new one, usually with a lower interest rate. Refinancing is a good way to save money. But it's hard to do it when you're stuck in negative equity.
Can I refinance with less than 20% equity?
While many lenders will lend you money with just a 5% deposit, you usually need at least 20% to refinance.
You could refinance with less than 20% equity, but you'd probably need to pay lenders mortgage insurance on top. This is true even if you paid lenders mortgage insurance the first time round.
Learn more about the amount of equity that you need to refinance your mortgage.
Example: Glen and Sara
- Glenn and Sara bought a house for $500,000 in 2016 with a 5% deposit. Their mortgage is an interest only loan for the first two years.
- In 2018 their loan switched to principal and interest repayments (and a very high interest rate).
- They decided to refinance. However, the market had declined since 2016 and their home was only worth $460,000. They hadn't paid off any of the mortgage because their loan was interest only.
- Glenn and Sara were stuck in negative equity.
How can I refinance if I haven't built up 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.
- 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.
Lenders won't accept my refinance — do I have any alternatives?
If you're unable to refinance then you might have to simply build equity by paying off more of your mortgage.
- Make extra repayments. Easier said than done, but if you have extra cash or other assets you can sell to help reduce your mortgage then you could build enough equity to refinance your mortgage.
- Add value to your property. Renovating the property could add value, if done correctly. You need to work out what renovations will add value and how affordable those renovations are. If you have handyman skills or know someone who does this could be a good option.
- Rent it out. You could rent out a room in the property to bring in extra money to help make repayments. It might not be an ideal option, but for some people it might be worth it.
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