An $850,000 refinance with $70,000 for renovations, and a valuation error caught in time
A Canberra couple, both PAYG, with two children in private school. Shane Howley at Finance Craft refinanced their existing debt into one $850,000 loan at a lower rate, with $70,000 of that funding home improvements, and rebuilt the repayment structure around their cashflow. The valuation report also came back with an error that would have forced them to over-insure the house.
The situation
Two borrowers, both PAYG employees, in a Canberra home valued at $3.5 million. Two children, both in private school. Their existing loan of about $780,000 was sitting on a rate they had stopped paying attention to, and they wanted $70,000 to fund improvements to the house.
Rolling the two together meant a new loan of $850,000. On paper this was the easiest kind of application. An $850,000 loan against a $3.5 million property is under 25 per cent LVR, so there was no lenders mortgage insurance question and no doubt about the security. The real brief was cashflow. School fees for two children are a large fixed cost that rises every year, and they wanted the mortgage to stop competing with it.
Structuring for cashflow without paying for it forever
Extending the loan term is the standard lever for lowering a repayment, and it is also the one that quietly costs the most. Their existing loan was already part way through its schedule. Writing a fresh 25 year term brought the minimum repayment down straight away, but on its own that just means paying interest for longer.
So the loan was chosen for two features that make the longer term optional rather than permanent. The first is unlimited extra repayments, which means the lower minimum is a floor rather than a plan. The second is an offset account. Every dollar of savings, bonus or short term cash sitting in that account reduces the interest charged on the loan without being locked away where they cannot reach it.
The result is a repayment they can comfortably meet during the school fee years, and a structure that lets them accelerate the loan again the moment those years are behind them.
Two numbers in the same valuation report
The valuation came back at $3.5 million, which was never going to be a problem at this LVR. The issue was further down the report.
It set the minimum building insurance at $1.6 million. The same report put the value of the house itself, without the land, at $950,000.
That is not a small gap and it looked like an error. A rebuild can legitimately cost more than the assessed value of the house, because rebuilding involves demolition, professional fees and construction costs that keep rising. It does not cost 68 per cent more.
The consequence of that error would have landed on my clients rather than the valuer. A minimum sum insured goes straight into the loan conditions, so they would have had to go back to their insurer and lift their cover substantially before settlement, then keep paying for that level of cover for the life of the loan. Most borrowers would simply do it. The figure comes from a professional valuation and it arrives as a condition of approval, so questioning it is not the obvious move.
So I wrote back to the lender, put the two figures from its own report side by side and asked for the valuation to be sent back to the valuer for review and amendment. The valuer revised it. The requirement came down to $1.3 million, which made the increase my clients had to make $300,000 smaller than the report first demanded.
The result
One $850,000 loan at a materially lower rate, $70,000 of it funding the home improvements. A 25 year term that brought the minimum repayment down, paired with an offset account and unlimited extra repayments so the loan can still be paid off faster. Total lending under 25 per cent of the property value. And a building insurance requirement $300,000 lower than the valuation first demanded, because the error was picked up before it became their problem.
The conditions are where the errors hide
Most borrowers look at one figure in a valuation and stop there. Market value decides the LVR, so it gets all the attention. But the same report also sets the minimum building insurance, and that becomes a condition of the loan. Whatever it says, you have to insure to it, and you keep paying for that level of cover for as long as the loan runs.
Valuers are professionals and they are also human. A valuation states what the building alone is worth and it states a minimum sum insured, so when the second sits far above the first, something has usually gone wrong. That gap is worth raising, because the lender can send the report back to the valuer for review and amendment. Nobody else in the transaction is looking for it.
The loan term is the same kind of detail. Set once, easy to accept without thinking, and worth getting right before settlement rather than after.
Refinancing and cash out, answered
Yes. Most lenders will write a new loan for up to 30 years, which resets the repayment schedule and lowers the minimum repayment even if the loan balance stays the same. The trade off is more interest over the full life of the loan, so the term is best paired with an offset account and the ability to make unlimited extra repayments. That way the lower minimum is a floor you can pay above, not a commitment to take longer.
Yes. Cash out for renovations and improvements is a standard and accepted purpose. Lenders will ask what the funds are for and, above certain amounts, may want quotes or a scope of works. Where there is plenty of equity and the loan to value ratio stays low, the assessment is usually straightforward.
The lender holds the property as security, so the valuation sets a minimum sum insured on the building and that becomes a condition of the loan. You have to insure to at least that figure and keep paying for that level of cover for the life of the loan. It is an assessment rather than a fact, and it can be checked against the building value stated elsewhere in the same report. If the required cover sits well above that figure, ask the lender to send the valuation back to the valuer for review and amendment. Done before settlement, that is one email. Done afterwards, you have already increased your policy.
No. Finance Craft is based in Coogee in Sydney's Eastern Suburbs, and loans are arranged for clients right across Australia. This case study was a Canberra property. Applications are handled by phone, video and email, so location is not a limitation.
Is your loan working for your cashflow?
Shane Howley is a mortgage broker based in Coogee, arranging loans for clients across Australia. He will review your current loan, work out what a refinance would actually change, and structure it around the way your money moves.
This case study describes a real loan I arranged, anonymised. Every situation is different and past results are not a guarantee of what a lender will approve for you. The information on this page is general in nature and does not take your objectives, financial situation or needs into account.