Property gear up or cash out is similar to refinancing except that rather than just refinance based on the outstanding amount, you take a loan based on the valuation of the property/land.
Take, for example, Daniel took up a $700,000 loan on his property worth 1 million with ABCD bank some years ago at 2% p.a with just $300,000 outstanding now. Interest rates have fallen and Daniel can by refinancing with another bank at the now 1%, enjoy a lower rate for his current outstanding, paying a lower instalment each month.
Gearing up/Cashing out your property, is taking into consideration the amount of equity you have built up over the years, (thus it’s also called Property Equity Loan, mortgage withdrawal or reverse mortgage in some regions), but rather than take a loan on the $300,000, Daniel takes a loan of $700,000 again - pay off the outstanding, and still have a cash flow of $400,000 which he can use to purchase another property or fund his business. If his property valuation has increased over the years or if another bank offers a higher Loan To Valuation (LTV) now, he could potentially cash out even more. Gearing up can also be done with property fully paid off.
For industrial and commercial machinery and equipment etc that have a high resale value even after taking note of depreciation, and with high liquidity that lenders can easily dispose of in the secondary market in the event of default, gearing up might also be possible.
But if interest rates have risen - instead of gearing up and borrowing say $700,000 at a higher interest with one lender, he could take a 2nd bank loan of only $400,000 while he still services the $300,000 outstanding with the 1st bank at a lower rate concurrently. The secondary lender places a lien/caveat on the property to protect its interests and it is called a loen loan or second charge loan because the lender is second in line after the primary mortgage lender. The term “caveat” is a Latin term that translates to “let him beware”. It acts as a warning for third parties that the lodging party, known as the “Caveator”, has an interest in the property/land. Note a caveat may at times prevent the owner of the land from transferring or selling the asset without the prior consent of the Caveator.
2nd charge loan is also used when cash flow is required only for a short period, such as a few months to a year, when the 1st loan is still locked-in, or when the borrower has very bad credit.
With FindTheLoan.com you do not have to worry about all the various terms used by different lenders. Reach all our lending partners with just one submission to compare and Find The Loan you need.