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The Ultimate Guide to Cash Out Refinancing: Unlocking the Hidden Equity in Your Home

By Cameron Thomson ·
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Cash back home refinancing money

Refinancing your home can be a useful way of getting a better deal on your mortgage. Sometimes, borrowers opt for cash out refinancing to access some of their equity as well. 

What is cash out refinancing?

Cash out refinancing involves refinancing your home loan to a larger amount and taking out a portion of your built-up equity as 'cash'. This allows access to a potentially large pool of funds, depending on how far you are into your home loan.

It's important to note that cash out refinancing is not a cashback offer. While a cashback offer is when a bank gives you money for refinancing with them, cash out refinancing accesses funds from within your newly refinanced loan.

How does cash out refinancing work?

Let's say you buy a property valued at $1,000,000 with a 20% deposit ($200,000). The bank gives you an $800,000 loan. After some time, you've contributed another $200,000, raising your equity to $400,000. You could then refinance to a better loan due to your improved loan-to-value ratio (LVR) of 60%.

If you needed $200,000 for an investment property deposit, a cash out refinance could provide quick access to those funds. However, your refinanced home loan would likely end up being larger.

Benefits of cash out refinancing

Cash out refinancing can improve your home loan terms while giving you access to a large sum of your home equity. It's particularly useful for significant purchases that might otherwise take too long to save for, such as medical emergencies or paying off high-interest debt.

People often use cash out refinancing for:

  • Paying off high-interest debt
  • A second home deposit
  • Medical emergencies
  • Home renovations.

The main downside is that you'll be resetting much of the equity you've built up over time. If you're already struggling with repayments, a cash out refinance could worsen your situation.

Additionally, approval for cash out refinancing requires a good credit history and sufficient home equity. There are also fees associated with refinancing, such as discharge fees, application fees, and possibly stamp duty.

Drawbacks of cash out refinancing

Is cash out refinancing right for you?

Cash out refinancing works best for borrowers planning to have their home loan long-term and who can afford it. It requires financial know-how and good money management skills.

Factors to consider before cash out refinancing

One of the first things to look for in a cash out refinance is that the bank you’re refinancing to actually has a cash out option. Provided that they do, you should make sure that you:

  • You can make repayments on your refinanced loan
  • You have a concrete plan for spending the cash out
  • You've compared home loans to find one with a good interest rate, low fees, and useful features.

Also, it might be a good idea to double check if what you want to do with a cash out refinance can be achieved by some other method. For instance, some home loan providers offer ‘extra’ cash for refinancing with them, although this tends to be about $3,000-$4,000.

How to apply for cash out refinancing

Provided you’ve made the decision for a cash out refinance and you know who you’re going to refinance with, you’ll have to go through the home loan application process. 

Also, you’ll need to inform your current home loan provider so that you can get the necessary documentation to refinance your loan.

FAQs about Cash Out Refinancing

What is the difference between a cash out refinance and a home equity loan?

A home equity loan is a loan that uses the existing equity (how much of the home you’ve actually paid off) as collateral. Meanwhile, a cash out refinance means that you actually use that equity to return some cash to you. 

When taking a cash-out refinance, can you change your loan type?

When refinancing, you can generally change your loan type (such as variable or fixed rate) from one to the other. 

Can I use the cash from a cash-out refinance for anything I want?

Your refinancer will generally ask you what you’re going to use the cash on as part of the approval process. This means that you may be restricted in what the loan providers see as an acceptable use of those funds.

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Last updated 21 November 2024 Important disclosures and comparison rate warning*

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Cameron Thomson
Cameron Thomson
RG146
Money writer

Cameron has a Bachelor of Creative Writing and History, and a background in broadcast media from his time at 2SER Radio. This diverse set of skills has informed his analytical yet creative approach to dissecting financial data and uncovering long-term trends in consumer finance. Cameron is RG146 certified for Generic Knowledge and keeps a keen eye on current and historical deposit and savings rates on the Mozo database. Cameron is also interested in tracking the investment space, particularly share trading platforms, to help Aussie consumers save and invest their money more wisely.

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** 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.

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