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[MoreMore Insights] What is stored equity and equity cash out

In simple terms, stored equity is the portion of the value of your house that actually belongs to you.

When you purchase a house on mortgage, legally you have ownership of the property, but you also have financial liability to the mortgage provider. Until you entirely paid off your mortgage, the mortgage provider will have some claim to the value of your house.

For example: if you have a property worth $1,000,000 at market value and have a remaining mortgage balance of $500,000, this means that you have $500,000 stored equity in your property. If you now pay $100,000 more to reduce your mortgage balance to $400,000 (excluding interest paid), then your stored equity will be $600,000 on your property. When you sell your house (liquidate your investment), this equity can be freed as cash.

Another way to free your stored equity in your property is equity cash out.

In simple terms, equity cash out means replacing your existing low remaining balance mortgage with a fresh mortgage with a higher balance, and the difference between the mortgage balances is cash for you to take out

A little background information: Two major criteria mortgage providers look at when they provide you with a mortgage is serviceability (are you able to meet monthly payments) and security (your real estate). Most mortgage providers will give you a loan at 80% of the market value of your property. This is because in case you can’t meet your repayments and defaults, the bank will sell your property to get their loaned amount back and the provider believes the property value will not drop below 80% of your purchase price, such that the provider can completely recover the loaned amount.

Using the previous example: your property is worth $1,000,000 and your mortgage balance is $500,000 because you’ve made many contributions already (some of your contributions are stored equity, some are interest paid). But from the perspective of a mortgage provider, your security is still valid for an $800,000 loan based on the 80% figure (assuming you meet the serviceability criteria). So if you refinance (i.e. replace) your existing mortgage of $500,000 balance to the new mortgage of $800,000 balance, the new mortgage provider will pay $500,000 to your old mortgage to clear it, and you have $300,000 to yourself as cash. You can then use the cash for an initial deposit when investing in another property, or any other reason where the new mortgage provider will approve of.

Contact us for more information and tailor your cashout strategy to your financial situation

Costs on the cash out strategy:

1. Because of the amortizing schedule of mortgages, your mortgage payments to the new loan will have less contribution to stored equity and more contribution to interest payments.

The Green area represents the schedule where your principal amount is paid off over the term, and the blue area above it represents the amount of interest paid to the lender. As the graph has shown, in year 0 (loan balance $800,000) you have a large portion of the amount owed as an interest to be paid, which goes to the lender and is not stored equity that you can get back. But in year 15 (loan balance $500,000), the interest portion is much smaller, meaning that more of your payment contributes to principal repayment and therefore stored equity. This is because interest is charged on your current loan balance, rather than the total amount owed.

Play with a loan repayment calculator to see for yourself

2. the mortgage provider will evaluate cash out amounts on a case by case basis, where the cash out the reason is restricted and the amount can often be limited (e.g. from the example, the new loan is limited to $700,0000 because the mortgage provider policy is set to max $200,000 cash out)

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