Should You Consider a Cash-Out Refinance?

With many Australian’s still being impacted by COVID-19, the situation has forced everyone to examine their financial situation closely.

If you’re one of those who are looking at ways to free up some cash ‘just in case’, then a cash-out refinance might be something to consider.

A cash-out refinance can work by taking out another loan, which is larger than your initial mortgage. This is usually a possibility when there has been some growth in the value of your property and you’ve been able to build up some additional equity.

 Generally speaking, homeowners are able to use the additional funds to put towards things such as purchasing an investment property, consolidating debt or even keeping it aside for a rainy day.

 However, there are also some other considerations that you will need to take into account. Not all lenders are as comfortable letting you ‘cash-out’ as they used to be. Depending on the type of loan and lender, you might even be required to indicate how you intended to use the funds that are going to be released. Speaking to a mortgage broker is usually the best place to start.

Advantages of Cashing-Out

        There is the potential to lower your interest rate with a new loan.

        If you are carrying a lot of high interest debt, rolling it into a new mortgage, could see you end up with lower payments.

        You can put the cash-out funds to good use and look to make some improvements to your current home or investment property – potentially adding value above and beyond the cash-out amount.

Disadvantages of Cashing-Out

        Leveraging off your family home if you’ve run into financial trouble might not be a sound plan.

        You can only borrow up to 80% of your property’s value before being forced to pay Lenders Mortgage Insurance (LMI).

        Your repayments could be higher and you might end up paying more interest if you extend the length of your loan.

        If you’re looking to consolidate debt, the benefits of lower interest costs might be offset by a longer loan term.

        There are costs associated with a cash-out loan.

 Before considering any type of cash-out or equity release where you’re home is at stake it is important to closely consider what you intend to do with the funds. There are other options available to access equity and even other types of loan products that might be more suited to your financial situation.

 The best place to start, is to speak with a mortgage broker to let them assess your personal situation.