Can I use equity to refinance?

Hi All,

For the sake of sounding ridiculous (because I have no idea if this is possible or not), here goes:

We have dropped to one income (whilst I'm bringing up 3 children under 3) and basically can no longer afford our mortgage.  We have decided to move to Queensland but would like to keep our PPoR as an investment property (if possible). 

Our weekly morgage repayments are $1000/pw and we can only get $700/pw (max) in rental income, thus leaving a shortfall of $300 (not even including rates, maintenance, vacancies, etc) which we simply cannot afford as we will either be renting or hoping to purchase another property in Qld to live in.

My question is this:   
We have approx $250k equity in our current PPoR.   Can we refinance and use this $250k equity to put back into our mortgage and therefore lessen our weekly repayments?   Does this make sense?

Thanks for your help
Boshie

Hi Boshie

I think i understand at what you are wanting to do but it is not as simple as that.

In saying this there are a couple of alternatives which would be just as effective and achieve what you are wanting to do however i would need further information including actual figures to provide you with a couple of options.

Let me know if i can assist.

Cheers

Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
www.tayloredfinancialsolutions.com.au
richard@tayloredfinancialsolutions.com.au.

Hi boshie,

Please take my comments with a BIG grain of salt, this is not financial advice, disclaimer, disclaimer, seek independant professional advice, etc......

Short Answer - yes, but....

Long Answer - be VERY careful.

Yes, you can (probably, depending on many things) refinance and borrow some of the equity you mention - perhaps in a Line of Credit type of account of sorts.  You can use this money to help with the repayments on your other main loan. It is a band-aid and short term solution. 

However - this means that you are paying off debt with debt.  Without careful and frequent financial monitoring this can easily get out of control and suddenly you can find yourself in a big mess.  Long term this can end in tears.

There are also potential tax/legal implications as well - "capitalising the interest on a loan" ie, claiming more interest as a deduction this year than you did last year can get complicated if you don't have any more assests.  there have been some high profile court cases in recent times where the Tax Office has taken investors to task who have done similar things to this.

As mentioned, it all can be done, and legally as well, as far as I am aware.  If I am wrong, I'm sure others reading this can point out my errors.  But, as also mentioned, it is a short term band-aid at best.

Another option might be to assess your family budget - you're probably doing this anyway - less takeaway food, fewer trips to the movies, home brand milk from the supermarket rather than a quick trip to the milkbar, etc.  Or even sell a car or similar and use the proceeds from that to fund your shortfall......

You might also find that refinancing and buying another property as an investment may actually improve your financial situation.

As Richard / Qlds007 has suggested, it might be worth taling to a professional or two to find out some options :-)

Good Luck !!

Thanks,

BDM

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Something to consider: how long have you owned the property?, how much of the equity that you claim is from paying down principal on the loan?

If the equity is from repayment of the principal rather than from an increase in property values (& assuming that you don't have an interest only loan), then it may be possible to refinance for a smaller amount than your current loan thus reducing your repayments. You will need to consider whether there will be any break fees, early repayment penalties or other factors (like fixed rate loans) which may impede your ability to refinance.