Unlocking home equity: weighing the pros and cons of equity release

Understanding equity release and its purpose for homeowners

Equity is the difference between your home's market value and the amount you still owe on your mortgage. For many Australians, their home is their most valuable asset, and tapping into its equity can unlock new opportunities.

Equity release typically involves refinancing your existing home loan. By doing so, you can increase your loan balance and access the difference as cash. This process is often used by homeowners looking to:

• Fund home renovations
• Consolidate debt
• Release deposit funds to buy an investment property
• Make large personal purchases such as a car or education
• Secure a better interest rate or loan features

For more background, you can read our in-depth guide on home equity and try our home equity calculator to estimate how much equity you may be able to access.

Types of equity release and the type that Yard offers

There are several ways to access home equity in Australia, but the most common forms include:

• Refinancing with cash out: The most straightforward method, where you refinance your mortgage for a larger amount and take the difference in cash.
• Line of credit loan: A flexible credit facility backed by your home equity, allowing you to draw funds as needed.
• Reverse mortgages: Typically available to seniors, where a lender provides funds based on home equity without regular repayments until the home is sold.

At Yard, we offer equity release through a cash-out refinance. This type of loan suits borrowers who meet standard lending criteria and are looking to use the released funds for approved purposes.

Equity release mortgages

An equity release mortgage is a type of home loan that enables you to access the value tied up in your property. Through refinancing, the existing mortgage is replaced with a new one that reflects the increased loan amount, including the equity being released.

Key features of an equity release mortgage include:

• A loan term and repayment schedule similar to traditional home loans
• Interest charged on the total amount borrowed, including the released equity
• The potential to access up to 80% of your home’s value (subject to lending criteria), with the possibility to borrow more than 80% in some cases - although this may attract Lender's Mortgage Insurance (LMI)

This product is ideal for borrowers with a strong repayment history, sufficient income, and a clear financial plan for using the equity. Learn more about the process of refinancing your home loan and how it may help you unlock your property's value.

Advantages of equity release

Equity release can offer a range of benefits for homeowners, particularly when managed responsibly. Here are five of the most common reasons Australians refinance to access equity:

1. Home renovations and improvements

Using equity to renovate your home can enhance your lifestyle and potentially increase the property's market value. Kitchen upgrades, bathroom remodels, extensions and landscaping projects are typical uses of released funds.

2. Investment property purchases

Equity can be used to access deposit funds for buying an investment property. This strategy is popular among homeowners seeking to grow their wealth through property and generate rental income.

3. Debt consolidation

Refinancing to consolidate personal loans, credit cards or car loans into your mortgage can lower your overall interest costs and simplify your finances. This is a common approach for improving monthly cash flow. For more guidance, see our dedicated article on debt consolidation loans, credit cards or car loans into your mortgage can lower your overall interest costs and simplify your finances. This is a common approach for improving monthly cash flow.

4. Major personal expenses

Some homeowners release equity to cover significant one-off expenses such as buying a vehicle, paying for education, or covering medical costs. While accessible, these uses should be carefully considered to avoid overextending financially.

5. Securing better rates or loan features

Refinancing to access equity often coincides with securing a more competitive interest rate or improved loan features such as offset accounts or redraw facilities. This can lead to both immediate and long-term financial benefits.

Disadvantages of equity release

Despite its benefits, equity release also comes with potential risks and limitations:

• Increased debt: You are effectively increasing your home loan balance, which may take longer to repay.
• Reduced future equity: Using up your equity now means less is available for future needs or inheritance planning.
• Loan costs: Refinancing can come with application, valuation, and legal fees.
• Potential for overcapitalisation: Using equity for renovations or purchases that don't add value could impact your financial position.
• Eligibility restrictions: Not all homeowners will qualify, especially if income or property values are insufficient.

Who should consider equity release?

Equity release may suit homeowners who:

• Have built substantial equity in their home
• Are comfortable with increasing their loan balance
• Need funds for specific goals like investing, renovating, or consolidating debt
• Have stable income to support larger repayments

However, equity release is not a one-size-fits-all solution. It’s important to consider your long-term goals, retirement planning, and whether alternative financial strategies may be more appropriate. If you're looking to better understand your mortgage and financial strategy, we also recommend reading our guide on how to manage your mortgage.

Alternatives to equity release that Yard also offer

Before deciding on equity release, it’s worth exploring other lending options available through Yard:

• Standard refinance: A home loan refinance without drawing additional funds, which may help secure better interest rates or loan features.
• Debt consolidation loans: Designed to roll multiple debts into your mortgage, simplifying repayments and potentially reducing interest costs.
• Line of credit: Offers flexibility to access funds only as needed, rather than receiving a lump sum upfront.
• Offset accounts or redraw facilities: Allow you to access surplus funds you’ve already paid into your home loan.

Each option comes with its own features and should be evaluated in the context of your financial objectives. Explore our full range of home loan products to compare other solutions that might better suit your financial goals.