Many mortgage holders don’t fully understand that they have very little control over their loan – or their money.
Despite having your name on the account and making your monthly repayments, the banks are the ones that ultimately decide what you can do with your money. Case in point? Cash-out policies.
A lender’s cash-out policy determines how they allow their borrowers to take advantage of the equity in their property. Equity is the difference between a property’s value and outstanding loan balance. If your property’s value is higher than your loan’s balance, you have equity in that property, and you may want to refinance your mortgage to access those funds.
A growing trend with lenders is that they want to play Big Brother by being more involved in how much money you have access to and exactly how you plan to spend it.
Lenders are increasingly asking for more evidence of funds from borrowers before handing over large amounts of cash. For instance, some lenders will want to see evidence of either a contract of sale for another property, or a letter from your accountant to show the money is being purchased for shares or plans and quotes for renovations.
In other words, they want to see a valuable purpose for the funds and they’re no longer as willing to hand over the cash for you to spend however you please.
While asking for plans and specifications is nothing new – as they’ll usually need this for the valuer, so they can include any future works in their assessment – asking for evidence to support investment purchases has only recently begun.
Furthermore, many lenders will not allow the funds to be dispersed until they actually hold the evidence.
For example, you might have an investment property worth $500,000 with a loan of $330,000 against it. You decide to borrow up to 80 per cent or $400,000 so you can access the additional $70,000 to use as a deposit on another investment property.
Your lender may insist that they will only release the funds to once they have proven that they have a contract of sale. If you had plans to invest $40,000 into a new investment property and the remaining $30,000 on a European holiday, you could find yourself in a spot of bother.
Some lenders that have started to do this include BankWest, ANZ and Firstmac. This demonstrates once again how important it is to have a qualified, experience mortgage broker on your team, so you can remain up to date on all of the latest industry trends and therefore one step ahead of the game.
Helen Collier-Kogtevs
Investor and author of ‘47 Biggest Mistakes Made by Property Investors and How to Avoid Them’.
