Everything you need to know about equity release

What is equity release?

Equity is the term used to describe the value of an asset – in this case, your home or investment property – less any amount owing. For example, if your home was worth $800,000 and you owed $450,000 to the bank, your equity would be $800,000 minus $450,000, or $350,000. Equity release is when you access this accumulated value.

There are three ways you can access your equity in property:

1. The first is by selling your property, repaying any remaining debt or loans against it, and banking the remaining cash (less any sale costs). In the example above, you would be left with $350,000 less the costs of selling the property such as agent fees and any government fees and taxes.
2. The second method involves borrowing against this equity in your home, however, you may not be able to borrow the full amount of your equity due to several reasons. These include the bank’s credit policy – specifically relating to their maximum loan-to-value ratio (LVR) – and your ability to take on and repay additional debt, also called serviceability.
3. The last way is by what is called a reverse mortgage. These are generally available only to those who are retired and on minimal income, and who are not able to meet the commitment of regular repayments of a loan. Instead of regular repayments, the interest is accrued on the balance owing and is due at the time the property is sold, or the death of the borrower. The maximum loan is a function of the value and location of the property, and the age of the borrower. The younger the borrower, the less the maximum loan amount will be. In most instances a reverse mortgage will not exceed more than 30% of the property value, and lenders will only provide reverse mortgages in properties located in more populated areas.

Who can equity release?

If you have equity in your property/s above the amount of debt you owe on it, you may be able to access funds through an equity release. You would be limited to how much equity you could access based on lender LVR restrictions and your serviceability.

How much equity can I access?

Accessible equity is the maximum amount of funds you can get by borrowing against your property. You can only access 100% of your equity by selling the property, or if you have other property (such as an investment property) or acceptable assets which are used to secure the loan.

The maximum amount of equity you can access is usually limited to 80% of your property’s value. To go over this amount may incur additional costs such as lenders mortgage insurance.

In the example above, let’s presume the lender policy on accessing equity was to a maximum of 80% of the property value, and that the borrower could afford a loan of this size. Here the property is worth $800,000, so the accessible equity is $640,000 less the existing loan of $450,000, leaving access to $190,000 of the available equity.

If you had a second property, worth say $600,000 and with $250,000 owing to the bank, you could potentially access 80% of the sum of the values of both properties. The value of both properties is $1.4m, 80% of these equals $1.12m. Less the existing loans of $450,000 and $250,000 ($700,000 in total) you may be able to access $420,000, subject to passing a serviceability assessment.

In the case of a reverse mortgage, the maximum amount accessible is around 30% of the property value. Presuming the $800,000 property above, this would mean a maximum loan of $240,000.

Why would you release equity?

There are many reasons you may want to access the equity in your property. One of the most common purposes of accessing equity in a property is to help cover the deposit and costs of purchasing another property.

Other purposes of accessing equity include home renovations and improvements; installing a pool; buying a car, boat, or caravan; investing in shares or managed funds; going on a holiday; and consolidating other debts.

Most lenders will accept any reasonable purpose for accessing equity in property, however many lenders will have rules and limits on what is called ‘cash out’ – where the additional loan funded is not controlled be the bank.

Lenders may require evidence of what the funds are to be used for or may insist on controlling the spending of those funds, such as by paying an invoice directly.

Someone may access equity via a reverse mortgage when they are retired to help supplement their retirement income, to pay for modifications to improve the liveability of their home, or to help access an aged care facility.

How to release equity in a property?

Releasing equity in a property involves having the property valued, and applying for a loan amount that is above any amount you already owe on the property. You will be subject to a credit assessment process which includes considering the purpose of the funds sort and a serviceability check to ensure you can afford to repay the additional borrowed funds.

For a reverse mortgage, the ability to make repayments on the loan is not considered as the interest is capitalised (added to the loan) and repaid with the proceeds from the sale of the property.

Costs of equity release?

The costs of releasing equity are no different to the costs associated with any other home loan. These can include valuation fees, lender fees, legal fees, and government fees. Your bank or broker will be able to assist you with a guide and breakdown of the charges you can expect for your situation.

Things to look out for with equity release?

It is important to note that an equity release is a term used to describe accessing the equity you have in a property and is not the name of a specific loan product. It is important to understand the terms of the loan product you are taking out to access this equity. It could be on a fixed or variable rate and have principal and interest or interest-only repayments. With a reverse mortgage, there may be no repayments at all!

Be sure to weigh up all the costs associated with your loan. In some cases, it may be financially better to consider selling the property or funding your requirements using other means such as savings or sale of investments such as shares.

Do lenders view equity release differently?

Lenders will always ask for the intended purpose of a loan, however when it comes to cash out the level of detail or evidence required can vary from lender to lender and depending on the amount of any cash-out portion.

For example, some lenders will limit cash out to say $100,000, whereas other lenders will allow unlimited cash out.

Releasing equity via a standard home loan product is also viewed differently to a reverse mortgage. Due to the complexity and cost of managing reverse mortgages, there are only limited specialist lenders offering this type of product currently in Australia.

How can a broker help with equity release?

In addition to taking care of all the paperwork and the application process for you, a broker can help in several other ways when it comes to accessing equity in your property.

Firstly, they can help you to work out how much equity you have in your home, and how much of that equity you can access.

A broker can also help evaluate different lenders’ options and provide recommendations based on your needs and requirements, and suited to your individual circumstances.

They will also be able to provide you with information on repayments and other important details of your loan and be able to guide you on the most appropriate loan structures.

As a broker works for you, and not the lender (this is enshrined in law), you can be sure your best interests are given priority above those of the lender.