How to use your home equity to get a cheaper home loan
As refinancers gear up to escape rising interest rates, there’s one tool in their arsenal they shouldn’t forget about: home equity.
Home equity is the value of your homeownership, i.e. how much your share of your property is worth. As you pay down your mortgage, you build up equity because you own more of the property. Your equity can also rise as your property value does, whether due to renovations or capital growth.
Usually, the more home equity you have, the better interest rates you could potentially access. Lenders like seeing borrowers with high equity because it means they're less likely to default on their payments and have a greater amount of security in their home.
As a rule of thumb: the safer borrower gets the lower interest rates.
Your equity can lower your mortgage interest rate
If we look at statistics from the Mozo database, we can see this trend in action. According to our numbers, a refinancer with a loan-to-value ratio of 80% (i.e. 20% home equity) pays an interest rate 0.53% lower than someone with an LVR of 95% (i.e. 5% home equity).
RELATED: Wait, what's the difference between LVR and equity?
So what does this 0.53% rate difference mean for your mortgage repayments? For a $400,000 home loan over 25 years, you could reduce your costs by $156 per month, or $1,872 yearly.
Here’s a breakdown of average variable rates based on LVR in the Mozo database.
| Home equity | LVR | Average variable rate |
|---|---|---|
| 5% of property value | 95% | 7.38% p.a. |
| 10% of property value | 90% | 7.13% p.a. |
| 20% of property value | 80% | 6.85% p.a. |
| 30% of property value | 70% | 6.81% p.a. |
| 40% of property value | 60% | 6.77% p.a. |
NOTE: Calculations current as of 12 January 2023. These averages assume an owner occupier making principal and loan repayments on a $400k loan.
Lenders may not always advertise LVR tiers lower than 80%, so this is where it's critical to do your own research, establish your LVR, and see if you can refinance to a lower rate – even with your own lender.
How to calculate your home equity
To calculate your home equity, you need to know two basic things: the market value of your property, and any outstanding debt you have against it like mortgage debt or personal loan debt.
Your home equity is then found using this equation:
Equity ($) = Home value - loan value
A property valuation can help you determine how much your home is worth.
To refinance, you’ll usually need at least 80% LVR (or 20% in home equity), although some lenders do accept LVRs of up to 90-95%.
Just bear in mind that refinancers with a LVR above 80% may have to pay Lenders Mortgage Insurance – even if you already paid LMI when you took out your first mortgage.
Banks also tend to be conservative in their property valuations, and property prices have swung wildly in the last few years. You may have more equity built up than you think!
Your refinance mortgage options
Once you’ve got a handle on your home equity, it’s time to check out competitive deals for refinancers. Here are a few award-winning to get the ball rolling.
Three of the best home loans for refinancers
Unloan - Variable Home Loan
- Variable rates from 5.74% p.a. (5.65% p.a. comparison rate*)
- Rate discount added annually (T&Cs apply)
As the winner of Best New Home Loan at the 2023 Mozo Experts Choice Home Loan Awards, Unloan has well-earned its prestige in the market.
With handy features, no provider fees, and a loyalty discount that shaves 0.01% p.a. off your rate each year (conditions apply), this mortgage built by Commonwealth Bank rethinks long-term commitments with the customer in mind. Not to mention its variable interest rate of 5.74% p.a. (5.65% p.a. comparison rate*) is one of the lowest on the market.
You must be a refinancer with at least 80% LVR to be eligible.
loans.com.au - Variable Home Loan 90
- Variable interest rate from 6.04% p.a. (6.06% p.a. comparison rate*) for LVR < 90%
- No application, monthly, annual, or redraw fees
Buying on a dime? This offer from loans.com.au took home a Low Cost Home Loan win at the 2023 Mozo Experts Choice Home Loan Awards.
With no monthly, ongoing, or application fees, unlimited free redraws, and an optional offset account (for an additional 0.10% p.a. on your interest rate, T&Cs), this variable interest loan has much to get excited about.
To qualify, you’ll need at least a 10% deposit, and keep in mind there’s a $300 settlement and $230 security assessment fee.
Up - Up Home Variable (Refinance Only)
- Variable interest rate 6.15% p.a. (6.15% p.a. comparison rate*) for LVRS < 90%
- No application, monthly, annual, redraw, or discharge fees
No need to haggle or negotiate: this is Up’s headline and only variable rate home loan. Spruiking a competitive variable interest rate and backed by Bendigo, Up Home is a remarkably low-fee home loan, all accessed through the aesthetically pleasing app.
While it’s only available to owner-occupiers buying or refinancing in major Australian cities, the free unlimited repayments with a redraw and up to 50 offset accounts make it an eye-catching offer. Plus, Up covers the first $400 of your property valuation.
To qualify, you'll need to buy property in eligible Australian cities (sorry regional Aussies) with an LVR of at least 90% (T&Cs).
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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.
** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.
^See information about the Mozo Experts Choice Home Loan Awards
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