Here's the smart way that homeowners are freeing up funds to finance the trip of a lifetime
Australians are steadily rediscovering their love of travel after the easing of coronavirus restrictions.
The number of people leaving Australia for overseas rose to the highest level in more than 12 months in March (338,870 departures) according to preliminary Bureau of Statistics figures.
With most Australians now vaccinated and typically having little trouble clearing entry requirements in most countries, now's a great time to be spreading your wings and exploring the main delights that the world has to offer.
Of course, if you're more interested in travelling around Australia, you are in very good company, also.
Domestic travel has boomed in the past 12 months. Airlines such as Qantas and Virgin are tipped to soon be almost back to pre-pandemic flight capacity.
Tourism operators around Australia are still lacking overseas visitors, and will be particularly pleased by visiting locals.
If you're a homeowner with equity in your property, the good news is that you may not need to tap into your savings to fund any upcoming travel.
Get a cash-out from the equity in your property that you can use for travel.
Refinancing to fund travel
Assuming you meet the lender's credit criteria, refinancing your home loan – which entails switching your current home loan to a different lender – means you can potentially kill two birds with one stone:
- Get a lower rate on your home loan (which means reduced monthly repayments or the ability to pay off your loan faster if you continue making the same repayments); and
- Get a cash-out from the equity in your property that you can use for travel.
Note: Lenders will typically require you to specify what you will be using the cash-out funds for, and not all uses will be approved, so be sure to check whether travel is accommodated before making an application.
Equity is simply the difference between what you owe on the home loan and what the property is worth. For example, if you have a property valued at $600,000 and a loan of $400,000, then you have $200,000 equity.
Equity can grow when the property value increases and/or your loan debt reduces, and it is an asset that you can use for other purposes, such as travel. With property values continuing to increase year on year, you may even find that you have more equity in your property than you realise.
Using the previous example, a house in Hobart valued at $600,000 in 2021 could be worth as much as $778,800 now. This is based on the Australian Bureau of Statistics residential property prices index, which showed record price surges across each capital city. Hobart led the charge with a whopping 29.8% increase in property prices.
Essentially, tapping into the equity in your property means you're borrowing money against your house. The benefit of this is that home loan interest rates are generally a lot lower than other types of credit such as personal loans and credit cards.
Be sure to check whether travel is accommodated before making a refinancing application.
Things to be aware of before refinancing
Refinancing your home loan and getting a cash-out can be a great way to borrow money at ultra-low interest rates, but there are several caveats to bear in mind.
There may be costs involved to refinance your loan to another lender. If you have a fixed interest home loan, the break fee can be considerable, and negate any savings you may achieve from the lower interest rate of the new loan. Even for variable rate home loans, there may be discharge and legal fees from your current lender and loan setup fees with your new lender that you'll need to factor. Additionally, if you still owe more than 80% of the property value, then you may need to lenders mortgage insurance to your new lender, which can be a substantial fee running into the tens of thousands of dollars.
You will also need to go through an application process as you went through for your initial loan, which includes a credit assessment where the lender looks at your financial situation to ensure you can afford the repayments. Even if you were approved for your home loan initially, a change in your financial situation – including changes to your income and incurring more debt – may affect your borrowing capacity.
Getting a cash-out also means you increase the debt you owe to your lender. While this debt is at a lower interest rate than what's typically charged for a credit card or personal loan, if it's spread out over the remaining term of your home loan, you can end up paying a lot more interest than you would have by going with one of the higher interest rate credit products. This is where it can be advantageous to create a new portion in your home loan for the cash-out amount and focus on paying that off sooner.
This information is of a general nature and does not comprise professional advice or product recommendations. Before making any decision about any investments, financial products and services, you should consult with your own independent legal, taxation and financial advisors, who can provide advice which takes into account your own personal circumstances, goals and objectives.
Terms and conditions and credit criteria apply. Government charges apply. Third party charges may also apply. *The comparison rate is based on a loan amount of $150,000 over 25 years with fees and charges payable. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.