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Refinancing - How Do I Calculate My Borrowing Capacity?

You want to refinance… everyone keeps talking about now being a great time to use your equity. But, you have questions about just how much cash you can access. How do you calculate your borrowing capacity before you get started with a refinance? Read on for our easy to understand guide to refinancing - because accessing your equity can be simple!

Why Refinance A Home Loan?

Homeowners tend to refinance for the following reasons:

What Is A Borrowing Capacity?

Borrowing capacity is the amount of money someone can borrow from a lender. It depends on their personal circumstances and is subject to a lender’s borrowing criteria. Your borrowing capacity for refinancing a home loan depends on how much equity you have in your property and your current Loan to Value Ratio (LVR).

What Is Equity?

Equity, quite simply, is the difference between your home’s current value and the amount you have left to pay on your home loan. This is important for refinancing calculations because most lenders will only loan you a mortgage with a maximum LVR of 95%. This means you cannot borrow more than 95% of the value of your property. 

How Do I Know What My Borrowing Capacity Is For A Refinance?

Talk to a professional mortgage broker! Finding out your borrowing capacity is made simple with an expert who is legally bound to work in your best interest. Your bank will only advise you on their interest rates and home loan products. A mortgage broker researches all the options and matches you with the best refinance deal available to you. 

A mortgage broker experienced in refinancing will be able to look at your current home loan as well as your property’s value (they’ll even order the home valuation for you!) and calculate what you could borrow.

Real world example for refinance borrowing capacity

Lucy’s home is worth $850,000 and she has $350,000 still owing. Her current equity in her home is $500,000. Taking into account her LVR, Lucy’s usable equity/borrowing capacity is: $330,000.

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Closer Look: How Do I Pay For A Home Renovation With A Refinance?

There are a few ways you can finance your home renovation. If you are wanting to update your home with a renovation, you can refinance with a new - or your existing - lender and have the cash amount deposited into your chosen bank account. Many homeowners use this option to fully fund their home renovations - whether it be one-off kitchen renovation, a bathroom remodel, a pool and deck area project, or a major house renovation. Savvy homeowners will use their equity to make home improvements that will boost their house value even further, quickly rebuilding their equity in their property.

Other Ways To Fund A Renovation Through A Mortgage Broker

Redraw funds - If you’ve made additional payments on your home loan, a mortgage broker can advise you whether redrawing some of those advance payments back off your loan is worth it.

Get a construction loan - Major renovations can be worth applying for a construction loan, which a mortgage broker can take you through the pros and cons.

Existing home loan top up - Instead of a full refinance process, a mortgage broker can help you navigate borrowing extra money against your home loan with your existing lender.

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Is it Worth it to Refinance?

There are many factors that can influence your decision on whether you refinance or not. While refinancing can incur additional costs, getting a lower interest rate and saving on monthly repayments may make you decide it’s worth it. Depending on your available equity, you might be up for paying Lenders Mortgage Insurance (LMI) but you also may have access to a cashback to boost your available cash for something like a home reno.

Chatting to one of our expert mortgage brokers about your goals and any questions you have can help you decide whether a refinance is right for you.

Work With An Experienced Team Of Brokers

There are many factors that will decide if a lender will approve your home loan refinance or not. Our team of mortgage brokers here at Pivotal Financial are experts in refinancing. A broker near you can help give you an accurate estimate of your borrowing power and can guide you so that you can get your mortgage refinance approved.

Call us today on (07) 3007 9088 for expert advice for your personal situation. We will be more than happy to help you!

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