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Can you use your home equity to refinance?

Home interior with a pet dog.

Home equity: it’s one of those financial terms that you’ve likely heard before, but might not quite be able to define. Don’t worry, you’re not alone.

If you’re a homeowner it's a concept worth knowing about, because it could affect everything from the home loan rate you receive to your ability to refinance your loan or even purchase another property.

Intrigued? Let’s get into it.

What is home equity and how does it work?

When you take out a mortgage, your lender maintains an interest in your home until your debt is completely paid off. Home equity reflects the portion you own outright — that is, the difference between what your home is worth and the outstanding balance on your mortgage.

As you pay off your loan though, the amount of equity you have will increase. The same will happen if your property’s value increases but, obviously, your equity will decrease if the value goes down. 

To determine how much equity you have, you’ll first have to find out how much your property is worth. You can do this by hiring an assessor to conduct a formal property valuation, using an online tool, or estimating using comparable sales in your area.

Example of home equity

Once you have your property’s value, working out your equity is as simple as subtracting the amount still owed on your mortgage. Here’s an example:

A few years ago Ella purchased an investment property which she recently had valued at $650,000. Over the years she’s also managed to pay down a fair bit of her mortgage, to the point where she currently owes her bank $275,000. 

As a result, she’s built up $375,000 worth of home equity.

How you can use home equity

So now that you know what home equity is, you’re probably wondering how it can actually be used. If you’re a homeowner there are a few ways you might be able to use built up equity to your advantage, including:

  • Purchasing another property
  • Refinancing to a better rate 
  • Renovating your current home

Can you use equity to refinance?

You may be able to leverage the equity in your home in order to refinance to a better home loan. This is because many lenders value ‘safer’ borrowers with higher built-up equity (and therefore a lower loan-to-value ratio) as they pose less of a risk than high LVR borrowers.

As a result, if you’ve managed to increase your equity and to lower your LVR below 80%, 70% or 60%, you might be able to switch to a new loan with a lower interest rate and take advantage of more affordable repayments.

Can you use your equity to buy another property?

If you’ve built up enough equity in your home, it doesn’t have to sit idle. You might be able to put it to use for other financial purposes, such as purchasing a new property, or refinancing so you can invest in another property. This is a common strategy among investors looking to build their portfolio.

That said, banks will be reluctant to let you use all your equity to fund your purchase. Typically, they will only release around 80% of your home’s value minus the amount you owe to the bank.

To illustrate, let’s say you owe $300,000 on a property that’s currently valued at $600,000. To find out how much equity you have access to, you’ll first need to calculate 80% of your current property’s value.

$600,000 x 80% = $480,000

Next you’ll need to take that value and subtract the amount still owed on your mortgage.

$480,000 - $300,000 = $180,000

That means you can unlock $180,000 of equity to use for a deposit. To calculate how much you could borrow, multiply the usable equity by four. In this example, you’ll be able to borrow $720,000 using $180,000 worth of equity for the 20% deposit.

Just keep in mind you’ll also have to budget for other costs associated with purchasing a home, such as valuation fees, settlement fees, and stamp duty.

What is negative equity?

Your home equity will change over time in response to housing market fluctuations and how quickly you pay down your loan. If you find yourself in negative equity, that means the amount you owe on your mortgage currently exceeds your property’s market value.

While this can be easy to avoid if property prices are rising and you’re making both principal and interest repayments, there are times where bad luck can strike.

For example, you might owe more than your home is worth if you bought at the top of the property cycle and the market is currently undergoing a correction. The same goes if you overpaid for a property and not enough time has passed for equity to build up.

Why is negative equity a problem?

Negative equity is mainly a problem if you intend to put your property on the market. Selling a home with a mortgage involves paying off the remaining balance, and if the amount your home is worth isn’t enough to cover it, you’ll have to make up the difference.

Depending on your circumstances, that might mean drawing from your savings or even selling other assets. Your lender might also decide to actively monitor your finances to make sure you’re not shirking your loan obligations.

If the final payout falls short and you can’t come up with the necessary funds to cover your debt, your lender will turn the issue over to their mortgage insurer. After paying out the shortfall to your lender, they will then commence the process of recovering the amount you owe.

RELATED: What's a reverse mortgage?

Interested in learning more about the various ins and outs of home loan features, property purchases and even investing? You’ll want to start at our dedicated home loan guide hub which features a range of handy resources.

Otherwise if you’re thinking about using the equity you’ve built up to switch to a better rate then get started by checking out the great refinancing offers in the table below, or check out our refinance home loan comparison table to view even more loans.

Compare refinance home loans - last updated 9 December 2023

Search promoted home loans below or do a full Mozo database search . Advertiser disclosure
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Niko Iliakis
Niko Iliakis
Money writer

Niko has three years experience as a finance journalist. He specialises in home loans, business loans and interest rate movements at Mozo.

Evlin DuBose
Evlin DuBose
Money writer

Coming from a diverse background in filmmaking, music production, and creative writing, Evlin is passionate about putting money-matters in relatable, personal contexts. Budget what? Finance who? She’s keen to find out!

* 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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