How to use your home equity to get a cheaper mortgage

By Katherine O'Chee ·
Refinancers doing research into home equity

As refinancers gear up to take advantage of record low mortgage rates, there’s one tool in their arsenal they shouldn’t forget about: their home equity. 

Home equity, or loan-to-value ratio (LVR), refers to the percentage of property value that belongs to you, rather than your lender. Generally speaking, as you pay down your mortgage, you build up your equity, but other factors like a home renovation or increased housing demand in your area can also improve your equity position. 

Usually the more equity you have in your home, the better rates you could potentially access. New Mozo data confirms this. 

According to our numbers crunch, if a refinancer has a 70% LVR as opposed to a 90% LVR (or 20% less home equity), they could snag average variable rates that are 51 basis points lower!

So what does this 0.51% rate difference mean? For a $700,000 home loan over 25 years, you could reduce your monthly repayments by $186.*

Here’s a breakdown of average variable rates based on LVR:

Home equity
LVRAverage variable rate**
5% of property value95%3.74%
10% of property value90%3.30%
20% of property value80%2.92%
30% of property value70%2.79%

“What most people don’t realise is that banks get cheaper funding for loans with lower LVRs, because they’re considered lower risk,” Mozo’s property expert, Steve Jovcevski said. 

“However in many cases lenders won’t actively pass those savings onto the borrower. You’ll often find that banks don’t advertise rate tiers below 80% LVR, so even if you have a 70% LVR, you may wind up getting the same rate as a customer with a 80% LVR. 

"That’s why it’s important to do the maths yourself - calculate your LVR and use that to negotiate a better rate.” 

That said, over the past couple of months, there’s been an interesting trend of lenders introducing LVR-based rate tiers. Athena, for instance, has rolled out a pricing system that automatically places borrowers on cheaper rates as they pay down their mortgage.

Tips when working out your home equity

To refinance, you’ll usually need at least an 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 they already paid LMI when they took out their first mortgage.

Jovcevski also warns that banks tend to be conservative in their property valuations so “you may need a bit more equity than you think”. 

“The reason is that the banks are covering themselves and trying to avoid losing any money. And there’s less likelihood of them losing money if they’ve valued your home lower than the so-called ‘real price’ which it would be selling at in the real estate market,” he says. 

Jovcevski recommends that borrowers subtract at least 5% from their assumed home equity. For instance, if you think you have 70% in equity, chances are it’ll be 65% in the banks’ eyes.

Luckily all the big banks offer free valuations, so that may be a good place to get your property value estimate before shopping around.

Your refinance mortgage options

Once you’ve got a handle on your home equity, it’s time to check out the bargain mortgage deals out there! Here are a few options to get the ball rolling…

UBank UHomeLoan - Discount Offer
Promoted
  • Variable rates from 2.49% (2.49% comparison rate*)
  • No application or monthly service fees
  • Min. 20% home equity

If you’re an owner occupier with at least 20% equity in your home, then this mortgage from 2020 Home Lender Bank of the Year^, UBank, could be worth a look. The UHomeLoan - Discount Offer doesn’t hold back on perks, with variable rates as low as 2.49% (2.49% comparison rate*) for loans from $100,000 and none of those pesky upfront or ongoing fees to worry about. Plus it offers plenty of flexibility, including free extra repayments, free redraws and the option to split your loan up to four times!

Loans.com.au Smart Home Loan
Promoted
  • Variable rates from 2.48% (2.50% comparison rate*)
  • Best rates available at 80% LVR or less
  • Flexible repayment options

Your number one priority for any refinance should be a great rate, and that’s exactly what loans.com.au delivers. With the Smart Home Loan, variable rates for LVRs of 80% or less start from 2.48% (2.50% comparison rate*) - one of the lowest in the Mozo database. If your LVR is between 80-90%, that rate jumps up to a still decent 2.79% (2.81% comparison rate*). Refinancers won’t have to pay any application or ongoing fees, and they’ll also have free extra repayments, a free redraw facility and a split account at their disposal.

HSBC Fixed Rate Home Loan
Promoted
  • 2-year fixed rates from 2.09% (2.98% comparison rate*) for LVRs below 80%
  • No application or ongoing service fees
  • Free extra repayments up to $10,000 per year

Like to keep things simple? While the HSBC Fixed Rate Home Loan doesn’t come with many bells and whistles, it offers the best of the basic features - minimal fees and stellar rates from 2.09% (2.98% comparison rate*) for two-year terms, given that your home equity is at least 20%. If you have less equity than that (10-20%), your three-year fixed rate jumps to a fair 2.50% (3.11% comparison rate*). Borrowers also have the option to match repayments to their pay cycle and make extra repayments up to $10,000 a year.

Suncorp Fixed Home Loan Special Offer
Promoted
  • 2-year fixed rates from 2.29% (3.16% comparison rate*)
  • Borrow with up to 90% LVR
  • Up to $3,000 cashback (ends 18 December 2020)

Refinancing with less than 20% in home equity? Suncorp’s got the deal with you. With its Fixed Home Loan Special Offer, you can snag two-year fixed rates starting from a competitive 2.29% (3.28% comparison rate*) for LVRs between 80-90%. Borrowers with LVRs below 80% will get the same headline rate of 2.29% (3.16% comparison rate), except they’ll have the benefit of a lower revert rate after the two-year fixed period ends (2.79% instead of 2.99%). Also for a limited time, when you refinance with a LVR under 90%, you could score up to $3,000 in cashback, depending on your loan size!

Newcastle Permanent Special Fixed Rate Home Loan
Promoted
  • 3-year fixed rates from 2.39% (3.66% comparison rate*) for LVRs below 80%
  • 95% LVR loans also available
  • Receive discounts when you bundle with insurance products

Newcastle Permanent proves that you don’t need a huge amount of home equity to refinance to a top-notch rate. With this home loan, you could borrow with a LVR as high as 95% and still snag competitive three-year fixed rates from 2.49% (3.68% comparison rate*). Rates get even better for borrowers with an equity of 20% or over - 2.39% (3.66% comparison rate) for three-year terms. Besides the rate, this home loan also packs a punch with additional discounts when you bundle the loan with your car insurance (5% off) or home and contents insurance (10% off).

AMP Professional Package Variable Rate Home Loan
Promoted
  • Variable rates from 2.59% (3.00% comparison rate*)
  • Cheapest rates at 80% LVR or less
  • 100% offset account

Why stick with your old mortgage when refinancing could earn you some serious savings? If you’re borrowing over $100k and have at least 20% in home equity, you could snag variable rates as good as 2.59% (3.00% comparison rate*) with the AMP Variable Rate Home Loan (Professional Package). Refinancers with LVRs of 80-90% can also access this home loan but the rate will rise to 2.86% (3.27% comparison rate*) for loan amounts from $500k or 2.89% (3.29% comparison rate*) for amounts between $100k-$500k. Either way though, you’ll be able to take advantage of AMP’s offset account - a feature that can go a long way to reducing the interest you pay on your principal amount.

*Calculations as of 30 September 2020, drawing on the rate difference between the 70% LVR loan average of 2.79% and the 90% LVR loan average of 3.30%. These averages assume an owner occupier making principal and loan repayments on a $400k loan. 

**These rates are averages of loans only available at that particular LVR tier. Averages as of 25 September 2020, assuming an owner occupier making principal and loan repayments on a $400k loan. 

^For more information including a full list of winners, visit our 2020 Mozo Experts Choice Home Loan Awards page.

*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, loan amount and term entered. 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.

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While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.

Katherine O'Chee
Katherine O'Chee
Money writer

Katherine O’Chee is Mozo’s international money transfer and forex expert and business banking writer. She keeps Mozo’s readers on top of the latest news and writes in-depth features to inform and help Australians make smarter financial decisions. Her work has been published in major media outlets including Sydney Morning Herald, SBS News and Bangkok Post. She has a Bachelor of Arts (Media and Communications) from the University of Sydney.