Smart ways to calculate home equity for refinancing

Your home equity is the portion of your property you actually own outright.

It's the difference between what your property is worth today and what you still owe on your mortgage. If your home is valued at $600,000 and you owe $450,000, you hold $150,000 in equity. That number matters when you're considering refinancing because lenders use it to determine what options are available to you.

The basic equity calculation

Subtract your current loan balance from your property's current market value. The result is your equity position. If you purchased a property for $550,000 with a 10% deposit and borrowed $495,000, and the property has since been valued at $620,000 while your loan has reduced to $470,000, your equity is $150,000. That's roughly 24% of the property's current value.

Lenders typically want you to retain at least 20% equity after refinancing to avoid paying lenders mortgage insurance. Some will allow you to refinance with less, but you'll need to factor in the additional cost.

Usable equity versus total equity

Not all of your equity can be accessed when you refinance. Most lenders will allow you to borrow up to 80% of your property's value without requiring mortgage insurance. If your home is valued at $600,000, that means the maximum loan amount is typically $480,000. If you currently owe $450,000, your usable equity is around $30,000.

Consider a couple who purchased in Oakleigh three years ago. Their property was valued at $720,000 at the time, and they borrowed $576,000 with a 20% deposit. The property is now worth $780,000, and their loan balance sits at $560,000. Their total equity is $220,000, but their usable equity without incurring mortgage insurance is closer to $64,000. That figure comes from multiplying $780,000 by 80% to get $624,000, then subtracting the current loan balance of $560,000.

If they wanted to access equity to renovate or invest elsewhere, they'd be working with that $64,000 figure, not the full $220,000.

How property values affect your equity position

Property valuations shift, and those shifts directly influence how much equity you can access. A valuation conducted for refinancing purposes is typically more conservative than a sales appraisal. Lenders use their own valuation methods, and the figure they arrive at might sit below what you'd expect based on recent sales in your area.

In suburbs like Box Hill or Glen Waverley, where property values have moved in recent years, a valuation conducted 12 months ago might no longer reflect current conditions. If you're planning to refinance and access funds, it's worth understanding that the lender's valuation will determine your borrowing capacity, not what you think the property might sell for.

Refinancing to access equity without increasing repayments

Accessing equity doesn't always mean your repayments need to increase substantially. If you've been paying down your loan for several years and your property has appreciated, you might be able to release funds while keeping repayments similar to what you're paying now, particularly if you're refinancing to a lower rate.

In our experience, couples who have been in their property for three to five years are often surprised at how much equity they've built through a combination of repayments and market movement. Releasing a portion of that equity to consolidate other debts or fund a renovation can improve cashflow without creating financial strain, provided the numbers are structured properly.

When refinancing to access equity makes sense

Refinancing to release equity works when you have a clear purpose for the funds and the cost of accessing them is manageable. Common reasons include consolidating higher-interest debts, funding home improvements that add value, or purchasing an investment property.

If you're carrying credit card debt or a car loan at higher rates, consolidating your debt into your mortgage can reduce the overall interest you're paying. The trade-off is that you're extending the repayment period on those debts, so the total interest over time needs to be weighed against the monthly cashflow benefit.

Refinancing purely to access equity for discretionary spending rarely makes financial sense. The funds aren't free, they increase your loan balance and extend the time it takes to own your home outright.

Equity calculations when you have an offset or redraw

If you've been putting extra funds into an offset account or using redraw, those don't change your equity calculation directly, but they do affect your net interest position and overall financial flexibility. Your loan balance is still the amount you originally borrowed minus any principal repayments you've made. Funds sitting in an offset reduce the interest charged but don't reduce the loan balance itself.

When refinancing, lenders assess your loan balance, not your offset balance. If you owe $450,000 but have $50,000 in offset, your equity is still calculated using the $450,000 figure. However, having that offset demonstrates savings capacity, which can strengthen your application.

Working out whether you need a formal valuation

Some lenders will refinance based on an automated valuation model or a desktop appraisal, particularly if the loan amount is modest and the property is in a well-documented area. Others will require a physical inspection. The type of valuation affects both the timeline and the outcome.

If your property is in a suburb with consistent sales data and few unique features, an automated valuation might come back close to your expectation. If you've renovated, or the property has characteristics that don't fit the typical profile for the area, a physical valuation is more likely to reflect the actual value. You can request the valuation type that suits your situation, but the lender makes the final call based on their risk assessment.

Calculating equity after renovations or improvements

Renovations can increase your property's value, but lenders won't automatically factor in the cost of works when assessing equity. They'll rely on a current valuation. If you've spent $80,000 on a kitchen and bathroom renovation, the property might have increased in value by $60,000, or $100,000, or somewhere in between. The only way to know is through a formal valuation.

If you're planning to refinance shortly after completing renovations, timing the valuation to occur after the works are finished ensures you're capturing the increased value. Refinancing before the work is complete means the valuation won't reflect the improvements, and you'll be working with a lower equity figure than you could otherwise access.

Many couples who are renovating their house will refinance in two stages: once to access funds for the renovation itself, and again after completion to restructure the loan based on the property's increased value. That approach requires careful planning around timing and costs, but it can provide access to funds without needing to use all available savings upfront.

Call one of our team or book an appointment at a time that works for you

Calculating your equity is one part of deciding whether refinancing makes sense. The other part is understanding what you want to achieve and whether the costs involved deliver a genuine benefit. If you're weighing up your options or want to explore how much equity you could access, call one of our team or book an appointment at a time that works for you.

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