Refinancing when you don’t have equity

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How do you refinance when your property has lost value or when you’re all out of equity? Your Investment Property explores your options

1. Shop around.

“If you want to refinance because you need to access more equity there are some challenges, but they can be overcome,” says Head of Mortgage Solutions at Investors Direct Vincent Power. “If more access to equity is your goal, it’s probably better to look for another lender.

“Banks simply don’t want to know that the value of a property they lent money against three years ago is now even lower than when they lent it to you; and what they thought was an acceptable Loan-to-Value Ratio (LVR) has now become a riskier one to them.

“Most serious investors will look to use 80% LVR as the normal lending limit for a property, avoiding Lenders Mortgage Insurance (LMI). Whether you need the 80% or not is irrelevant, it’s best to get it. Whatever funds you don’t need, simply place back into the debt until you do need them. It’s far safer to have the funds available than have to approach a lender again later when you need it.”

2. Pay off your loan.

“Improve your equity position by paying it off,” says Director of Operations at State Custodians Mortgage Company Heidi Armstrong. “A lot of investors think [only as far as] ‘my plan will be to buy properties, the market value will increase, and that’s when I pull out the equity and invest further. But in a soft market the only other way is that you buy, pay off the loan, and build up your equity that way.”

3. Improve your credit history.

Make sure you pay all your bills on time, no matter how small. If you don’t have any credit history, get a credit card and pay your bills off each month.

4. Understand all the features of your mortgage.

It’s not all about the rate. You need to have flexibility, so you can draw down your loan and use that equity.

5. Avoid cross-collateralisation.

“It’s a classic mistake investors make and banks are the worst offenders of this,” says Armstrong. “An investor will approach a bank wanting to release equity in one property to buy another. The bank says ‘no problem, here’s the loan approval for the full amount, buy your property’. But what the bank has done has crossed the two securities [on both properties] and the loan contract is now tied to both.”

She says this causes problems down the track.

“For example, if one of the properties has great growth and you want to sell it, then the bank will revalue your entire portfolio, and force you to put the $40,000 you made into the loan to keep the LVR acceptable on the original property,” she says.

Armstrong says investors must keep the loan split between the two to avoid those wider implications.

“On the existing property, have one loan with two splits [the original loan plus the new deposit] and then take out a completely separate loan, maybe with a different lender, for the purchase of the second property.”

6. Don’t panic.

“Some people panic when the market goes down but they don’t realise just because the property’s value has dropped, they are still at 60% LVR and there are opportunities,” says Armstrong.

“Between zero and 80% LVR, there’s a lot of room to manoeuvre. You may just have to rethink the size of the purchase … maybe you were thinking $400,000, so now you have to think $200,000.

“If you are under the 80% LVR, there are opportunities and the more you are under, the more flexibility you have in a softening market. It’s this time when you want to take those opportunities.”

7. Go to another lender.

“You could try another lender and hope for a better valuation, but the problem is most lenders use the same panel of valuers, so odds are you might end up with the same valuer and therefore the same result. Even lenders, who let you get a valuation done prior to the application, don’t let you choose your own valuer so ultimately you don’t get control over the process.

“Most lenders will let you dispute a valuation if you insist, but you need to provide comparable sales within a three-month period for the valuer to review. Generally the valuer has already done this so the chances you will find something they did not is very, very small. Also, in my experience, a valuer is usually reluctant to change a valuation they have already signed off on, regardless of what info you provide.”

8. Use a professional.

Power says presenting yourself positively to lenders is complex and you need assistance.

“I always recommend using a professional when putting your finance application together. There are so many different layers to finance that it is easy to overlook an important aspect simply because you aren’t aware of the importance of it,” he says.

9. Maximise your valuation.

Personal Mortgage Adviser, Scott McCray, at Smartline Personal Mortgage Advisers says you can do this by preparing your property.

“Present it well. Tidy the gardens, give it a paint job and keep it neat and clean. If you want to add value, make cosmetic renovations such as adding carpets, painting, new lighting and tap fittings, or minor upgrades to the kitchen and bathroom. Better still, why not add another room? Sometimes you can create another bedroom within the existing structure. Or fill in the veranda for a more impressive outdoor area or add a carport.”

McCray adds that if you want to increase your rental yield, you need to make regular reviews as a higher rent influences valuation. But don’t forget you can create equity by purchasing well. “If you buy under market value then it’s easier to gain equity,” he says

McCray also advises that investors shop around as banks “vary considerably on valuations”.
“If you are not happy with the valuation from your current bank, go to a broker. They can order a valuation up-front from another bank. If it’s higher, then re-finance with that bank,” he says.

“If you are still getting a low valuation, then wait three to six months. And if the market has moved up by then, order another one.” 

McCray says if all else fails, you can up your LVR to as much as 95%. “Banks allow you to purchase at 95%, but only allow you to draw up to 90% to access equity. Yes, it will cost you more in LMI initially at purchase, but you can add the LMI to the loan and can keep more cash ready for the next deposit and property.”

Top Suburbs : west wodonga , newtown , new farm , coburg north , flemington

  • Jenny says on 25/10/2013 07:35:50 AM

    Why would anyone suggest pay more into your home loan to build up usuable equity. CASH IS KING. If you want to do another project save the money into a separate account and use that down the track. Trying to get a bank to unlock equity is one of the hardest things to achieve. They have such ridiculous parametres that the valuer is going to value the property at 20 - 40% below which means you will be disappointed if your home loan structure is set that you cant just draw out that money without their permission.

    On a side note I honestly think it is about time their was an Australia wide class action against valuers and the banks for valuations. The valuers don't want to get sued by the banks so instead they significantly devalue your home, when you indirectly pay them, which could cause unnessary hardship or having to sell the home just to access your funds that you earned and deserve if you are ina position to make the repayments.

    Is this a "Valuation"??? NO. They do not earn that title in my opinion. They are guestimators out their trying to earn a living doing an easy job while protecting their own arse.

    So this article was quite humorous to me in saying put more money into your home loan to build up equity. Actually humourous is the wrong is actually scary to be advising people to put more into their home loan. Building up equity implies you want to use it for something. Now if you just want to pay off your loan as quickly as possible that is a different story but that is not what this article is about.

    Don't ever give the bank much more than what you need to. Be in control of your own money. Get a loan with an offset account so the money you save you control is still working against your home loan to reduce the interest.

    Doing this you will be cash ready for your next project, you will not have to spend money refinancing to draw on equity, have the flexibility to go to a different bank for your new project (not cross securitising your home is a must - meaning do not tie up one home to buy another, if you get in trouble that bank will take both) and all in all will cause you less sleepless nights and ulcers.

    Hope this saves a few people from making a big mistake they could make on the advice of this article.

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