So you have owned your home for a several years, your repayments have all been on time and now there is enough equity in your home for you to refinance your mortgage and release some money for you to use. Many people take this opportunity to invest, renovate, consolidate debts or take a holiday! What can you do with your equity?

Of course getting approval for a home loan isn’t as easy as it used to be. There are a few factors you need to consider which can have an effect on the outcome of your loan application.

1. What is your LVR?

The Loan to Value Ratio, or LVR, is the percentage of the property value that you are borrowing. So if your home is worth $500,000 and you are borrowing $400,000 then you have a LVR of 80%. The lower the LVR the lower the risk to your mortgage lender.

As a general rule loans for less than 80% LVR are considered safe, whereas loans for more than 80% are risky, the lender may actually lose money in the even that you can’t pay the loan. For this reason the approval guidelines are much tougher for high LVR equity mortgages.

2. The loan purpose is critical!

Did you know that the purpose of the loan can make all the difference to if you get approved or not? Banks know from experience that people borrowing for reasons such as debt consolidation, repaying tax debt or for consumer spending are a higher risk than those that are borrowing to fund renovations, invest or to pay for their children’s education.

As a result they will give your loan a lower credit score if it isn’t for one of the purposes that they deem to be a low risk. If you are borrowing over 80% of the property value then the lender may have “cash out” restrictions. This means that they reduce the amount of funds that can be released directly to you. If you provide evidence of what you are using the funds for by providing renovation quotes, a statement of advice from a financial planner or a contract to buy an investment property then they will waive these restrictions.

3. Choosing the right lender

Every mortgage lender has their own view of equity loans. Some see them as a high risk, others see them as an opportunity to get additional market share! So again some will be conservative when assessing your loan. If you choose the right lender to apply with from the beginning then you’ll not just get a great rate but also have a higher chance of getting approval.

The best way to do this is to use a mortgage broker. They deal with equity mortgages on a daily basis, and can quickly work out the best lender to apply with to get your loan approved.

4. Get expert advice

Choosing the right mortgage broker can be difficult. Try Googling ” equity mortgage ” to find a broker in your area that specialises in releasing equity. This area of borrowing is quite tricky, so be sure to ask your broker about their experience with equity loans and why they are recommending the lender that they choose for you.

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