Using Home Equity in Australia: How to Access It and What It Costs

A home equity loan lets you borrow against the share of your property you already own, without selling it. In Australia most lenders will let you access up to 80 per cent of the property's value minus the balance you still owe, and whatever you draw is added to the debt secured against your home. At Spotto Finance we compare 30+ lenders for Melbourne homeowners, and the same equity can produce very different offers from one lender to the next.

This guide covers how equity is measured, the ways to release it, what the exercise costs and when to bring in help.

What Is Home Equity and How Is It Measured?

Home equity is the difference between what your property is worth today and what is left on your mortgage. It grows two ways: by paying the loan down, and by the property's value rising. Lenders measure it from their own valuation, not from a listing portal estimate.

• Property value: the figure the lender's valuer puts on the home, which can be lower than a sales estimate.
• Loan balance: the current payout figure on your mortgage, including any redraw you have already used.
• Equity: value minus balance, which is your position on paper.
• Usable equity: the smaller slice a lender will actually release to you.

The gap between equity and usable equity is where most applications come unstuck, so it is worth understanding before you plan a spend.

How Much Equity Can You Actually Access?

Lenders do not release all of your equity. Most work to a loan-to-value ratio of 80 per cent, because ASIC's MoneySmart notes that lenders mortgage insurance becomes payable once the amount borrowed exceeds 80 per cent of the property's value. Accessing equity above that line is sometimes possible, but it usually brings an insurance premium with it.

• Take 80 per cent of the lender's valuation.
• Subtract your current loan balance.
• What is left is your indicative usable equity.
• Your income and expenses then decide how much of that you can service.

The table above is an illustration to show the method, not a quote or a prediction. Your own figures depend on the valuation, your loan balance and the lender's policy on the day.

What Are Your Options for Releasing Equity?

There is no single product called equity release in Australia; there are several structures, and the right one depends on what the money is for. A broker's job is to match the structure to the purpose rather than default to the easiest option.

• Loan top-up: your existing lender increases the loan on the same security, usually the simplest route.
• Separate split or equity loan: a second account on the same property, which keeps the new borrowing visible and separate.
• Home equity line of credit: a revolving limit you draw from as needed, often at a higher rate than a standard loan.
• Refinance with cash out: moving to another lender and releasing equity in the same application.

What Does It Cost to Access Your Equity?

The headline cost is interest on a larger loan for longer, and that is usually bigger than any fee. Lenders also charge for the mechanics of the increase, and the amounts differ enough that comparing is worthwhile.

• A valuation fee, where the lender does not absorb it.
• Loan increase, settlement or documentation fees on the new amount.
• Lenders mortgage insurance if the total borrowing passes the 80 per cent mark.
• Discharge and registration costs when you move lenders to release equity.
• Higher ongoing interest on revolving products compared with a standard variable loan.

Spreading a short-term cost, such as a car or a holiday, over a 30-year mortgage can cost far more in interest than a shorter loan would, even at a higher rate. Our calculators are a quick way to see what an extra drawdown does to the repayment before you commit.

Can You Use Equity to Buy Another Property?

Using equity to buy property is the most common reason Australians ask about a top-up. The equity usually funds the deposit and purchase costs on the next home, while a separate loan funds the balance of the price.

• Equity covers the deposit and costs such as stamp duty and conveyancing.
• A second loan, secured by the new property, covers the rest.
• Lenders assess both loans together, so the serviceability test applies to the whole position.
• Keeping the two securities separate avoids tying both properties to one lender.

How the structure is set up matters for tax and for your flexibility later, which is why an investment property mortgage broker in Melbourne will usually ask what the money is for before recommending a lender. Ask your accountant about deductibility; purpose, not security, generally drives it.

What Do Lenders Check Before They Release Equity?

Accessing equity is a new credit application, not an administrative change, so the lender re-assesses you. A strong equity position on its own does not guarantee approval.

• Valuation: an updated figure, sometimes desktop and sometimes a full inspection.
• Serviceability: your capacity to repay the larger balance, tested at a margin above the actual rate. APRA has kept the mortgage serviceability buffer at 3 percentage points.
• Purpose: what the funds are for, with evidence such as quotes for renovation work.
• Credit conduct: repayment history, defaults and current limits on cards or personal loans.

In our work with Melbourne homeowners, two households with identical equity often get different answers because one lender shades bonus income or counts a credit limit more harshly than another. Comparing policies across 30+ lenders is usually what turns a declined top-up into an approval, and a refinancing mortgage broker in Melbourne can tell you quickly whether your current lender is the right one to ask.

What Are the Risks of Drawing on Your Equity?

Equity is not spare cash. Every dollar you draw increases the debt secured against your home, which means the family home carries the consequence if the repayments become unmanageable.

• Your repayments rise, and they rise again if rates move.
• A falling market reduces your equity while the larger loan stays the same.
• A revolving limit can be redrawn repeatedly, so the balance may never reduce.
• Consolidating short-term debts into a mortgage lowers the monthly figure but can raise the total interest paid.
• Cross-collateralising two properties with one lender limits your options when you want to sell or refinance.

How Do You Get Started Without Guessing?

The order matters. Working out what is available before you decide what to spend keeps the conversation realistic.

1. Get an indicative valuation and your current payout figure.
2. Work out indicative usable equity using the 80 per cent method above.
3. Write down the purpose and the amount you actually need.
4. Check serviceability for the higher balance, not only the equity position.
5. Compare structures and lenders, then apply once rather than shopping around on your credit file.

This article is general information only and does not take your circumstances into account; speak to a mortgage broker and your accountant before acting on it. Spotto Finance holds an Australian Credit Licence (CRN 564353). If you would like someone to run the numbers with you, our home loan brokers in Melbourne will check your equity, your serviceability and the lender policies that apply to your situation.