Release of money to purchase again.......
- Thread starter zaligirl
- Start date
Hi zaligirl
You own a property which you bought for $200,000 5 years ago. The property is now worth $300,000
(a) REDRAW:
You originally took out a loan for $160,000. The loan is Interest Only for the first five years. The rate is 12%per annum. Your monthly interest is $1,600
You have paid monthly payments as if the loan is Principal & Interest over 30 years, so you have paid $1,646 per month for each of the 60 months, so you have paid an extra $2,760 ($46 x 60) which has offset the Principal: The ‘balance’ of the loan is now $157,240.
You have REDRAW funds available of $2,760. What you put in, you can take out.
If you do not continue to ‘pay extra’, then when the loan rolls to Principal & Interest, the whole of your monthly payment of $1,646 will be directed firstly to payment of interest, and secondly to reduction of the principal balance of the loan. Unless specified otherwise, the reduced principal balance cannot be redrawn. Should you make payments greater than the $1,646, then the extra funds will be off-set against the principal and can be redrawn as above
(b) RELEASE OF EQUITY:
Your property is now worth $300,000. Your loan balance is $160,000, representing 53% Loan to Value Ratio.
Your lender allows you the option of increasing the original loan back up to 80%LVR so you RELEASE EQUITY by increasing the loan to $240,000. This allows you to drawdown equity as ‘cash out’ of up to $80,000.
You can then 'redraw' these extra funds as per the loan type and facility offered by your lender
(c) LINE OF CREDIT:
A LINE OF CREDIT is a particular type of loan, which can also be called a ‘revolving’ line of credit. The loan facility is set up for $160,000, and to use this type of product efficiently all income should go into the loan account and all expenses be paid from the loan account. Lines of Credit usually have cheque books, debit cards, linked credit card facilities, internet banking, ATM and EFTPOS access etc In other words, you can buy your petrol and pay for it by using the debit card connected to your home loan. You can spend only the funds available, and when you reach an outstanding balance $160,000 there is no more credit.
Lines of Credit differ widely between lenders. Some of the more efficient products are able to rely on the ‘traffic’ through the account and do not require a separate monthly payment to be made. The interest can be added (capitalised) to the loan and will be paid as deposits are made in to the account.
So the three answers are:
Redraw means you can pay extra money in when you want and redraw the money later
Releasing equity means restructuring the loan secured against the property as the property improves in value
A Line of Credit is great if you are happy to have all your money in the one account. However, most modern loans have redraw facilities and Lines of Credit are not usually available > 90%LVR or for construction purposes due to insurance restrictions
Please be aware that every lender has different policy and product guidelines. Some lenders do not offer redraw, not all offer Lines of Credit, and some do not allow 'equity release' if it is for cash out eg if you gave the reason for increasing the loan as to purchase a motor vehicle, some lenders would control the funding ie make the cheque out to the motor vehicle dealer. Other lenders will allow the equity to be used as 'cash' with no restrictions or controls.
Hope this helps
Kristine
You own a property which you bought for $200,000 5 years ago. The property is now worth $300,000
(a) REDRAW:
You originally took out a loan for $160,000. The loan is Interest Only for the first five years. The rate is 12%per annum. Your monthly interest is $1,600
You have paid monthly payments as if the loan is Principal & Interest over 30 years, so you have paid $1,646 per month for each of the 60 months, so you have paid an extra $2,760 ($46 x 60) which has offset the Principal: The ‘balance’ of the loan is now $157,240.
You have REDRAW funds available of $2,760. What you put in, you can take out.
If you do not continue to ‘pay extra’, then when the loan rolls to Principal & Interest, the whole of your monthly payment of $1,646 will be directed firstly to payment of interest, and secondly to reduction of the principal balance of the loan. Unless specified otherwise, the reduced principal balance cannot be redrawn. Should you make payments greater than the $1,646, then the extra funds will be off-set against the principal and can be redrawn as above
(b) RELEASE OF EQUITY:
Your property is now worth $300,000. Your loan balance is $160,000, representing 53% Loan to Value Ratio.
Your lender allows you the option of increasing the original loan back up to 80%LVR so you RELEASE EQUITY by increasing the loan to $240,000. This allows you to drawdown equity as ‘cash out’ of up to $80,000.
You can then 'redraw' these extra funds as per the loan type and facility offered by your lender
(c) LINE OF CREDIT:
A LINE OF CREDIT is a particular type of loan, which can also be called a ‘revolving’ line of credit. The loan facility is set up for $160,000, and to use this type of product efficiently all income should go into the loan account and all expenses be paid from the loan account. Lines of Credit usually have cheque books, debit cards, linked credit card facilities, internet banking, ATM and EFTPOS access etc In other words, you can buy your petrol and pay for it by using the debit card connected to your home loan. You can spend only the funds available, and when you reach an outstanding balance $160,000 there is no more credit.
Lines of Credit differ widely between lenders. Some of the more efficient products are able to rely on the ‘traffic’ through the account and do not require a separate monthly payment to be made. The interest can be added (capitalised) to the loan and will be paid as deposits are made in to the account.
So the three answers are:
Redraw means you can pay extra money in when you want and redraw the money later
Releasing equity means restructuring the loan secured against the property as the property improves in value
A Line of Credit is great if you are happy to have all your money in the one account. However, most modern loans have redraw facilities and Lines of Credit are not usually available > 90%LVR or for construction purposes due to insurance restrictions
Please be aware that every lender has different policy and product guidelines. Some lenders do not offer redraw, not all offer Lines of Credit, and some do not allow 'equity release' if it is for cash out eg if you gave the reason for increasing the loan as to purchase a motor vehicle, some lenders would control the funding ie make the cheque out to the motor vehicle dealer. Other lenders will allow the equity to be used as 'cash' with no restrictions or controls.
Hope this helps
Kristine
Last edited:
Similar threads
