How much equity do I need to refinance?

Rates and Fees verified correct on January 18th, 2017

How does equity influence my ability to refinance my mortgage?

refinance mortgageWhen you choose to refinance your existing home loan, you should take into account the amount of equity you’ve built up in your home as this can determine your refinancing options.

Some refinance home loans reward lower loan-to-value (LVR) ratios with better interest rates if you have more equity, so it pays to find out how much equity you have before refinancing with a new lender.

If you intend to borrow more than 80% LVR ratio for the new mortgage, you might end up paying Lender’s Mortgage Insurance (LMI) again (even if you’ve already paid it on your original loan).

So although you may have found a good refinancing deal, refinancing may not be the best option if you have to pay LMI twice.

Read on to find out how much equity you need to refinance.

What is equity?

When you make payments towards the principal amount of your home loan you build up equity in your home. The equity is the difference between your home's value and what you have left to repay on your loan. This is the money you can expect to remain if you sell your home and repay your loan with the proceeds from the sale. For example, if you live in a home worth $750,000 and you still have to repay $250,000, you have $500,000 in equity. The equation for equity is given below:

Equity = property value - outstanding loan amount

How much equity do I need when refinancing?

Building equity in your home is particularly important if you plan to go down the refinancing path. Many loans come with a maximum LVR of 95%, which means you cannot borrow more than 95% of the value of your home. What this also means is that if you wish to refinance you have to have at least 5% equity in your home.

In order to qualify for a refinance mortgage, you should have at least 20% equity in your home.

Applying for a refinanced home loan with no equity is difficult unless you can get someone to go guarantor. Find out more about how you can refinance your home loan with little or no equity.

Remember that lenders look at your equity as a means to assess risk. The more equity you have, the lower risk you present to the lender.

Refinancing home loans comparison

Rates last updated January 18th, 2017.

ME Flexible Home Loan Fixed - 3 Year Fixed Rate (Owner Occupier)

Comparative rate increases by 0.07%

January 4th, 2017

ME Flexible Home Loan With Member Package - LVR <=80% $400k up to $699,999 (Owner Occupier)

Comparative rate increases by 0.10% | Interest rate increases by 0.10%

January 4th, 2017

ME Basic Home Loan - LVR <=80% Owner Occupier

Interest rate decreased by 0.10%

January 4th, 2017

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Jodie Humphries Jodie
$
% p.a.
Offset account
Split account
Loan type
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Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Maximum LVR Amount Saved
3.74% 3.74% $0 $0 p.a. 80% Go to site More info
NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier)
A fixed rate package loan with flexible repayments options.
3.98% 4.87% $0 $395 p.a. 95% Go to site More info
Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed ($150K+ Owner Occupier)
Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.
3.59% 4.42% $0 $375 p.a. 80% Go to site More info
State Custodians Standard Variable Spring Special - LVR 80% (Owner Occupier)
Special Owner Occupier Rate. Free Offset Account.
3.59% 3.92% $0 $299 p.a. 80% Go to site More info
IMB Accelerator Home Loan  - LVR <=80% $300k+ (Owner Occupier)
A two year discounted rate which reverts to an ongoing life of loan discount afterwards.
3.64% 4.39% $445 $0 p.a. 80% Go to site More info
ME Flexible Home Loan With Member Package - LVR <=80% $400k up to $699,999 (Owner Occupier)
Enjoy a discount of a competitive interest rate and 100% offset account.
3.94% 4.35% $0 $395 p.a. 80% Go to site More info
loans.com.au Essentials - Variable (Owner Occupier, P&I)
A low-interest rate loan suited for refinancing with no application or ongoing fees.
3.59% 3.61% $0 $0 p.a. 80% Go to site More info

What if I don't have at least 20% in equity?

When you choose to refinance without at least 20% equity in your home, there's a good chance you'll have to pay LMI again. This is because you cannot transfer the existing LMI to the new loan, despite the fact that your previous lender is no longer at risk.

While getting a rebate when you terminate your LMI policy is possible, it’s crucial that you ask for it. Most LMI policies don't offer rebates if you've held your home loan for longer than 12 or 24 months. Even if you do get a rebate, this is usually not for the full amount. If you have to get LMI again, you could pay thousands.

Consider LMI costs in the following examples which use the Genworth LMI calculator.

Home valueEquityLVRLMI cost
350,00060,00082.86%$2,059
500,00050,00090%$8,820
600,00080,00086.67%$8,944

As you can see, the cost of LMI can be highly expensive which can outweigh the value of any savings you could net from switching lenders.

Alternative options

Before comparing refinancing options, find out how much equity you have in your home. If you don’t have a 20% deposit saved but aren’t far off the mark, it might make sense to wait until you've built up a higher amount of equity.

Alternatively, you can consider applying for a guarantor home loan or applying with specialist banks that may have less stringent lending criteria for refinance mortgages.

Compare refinancing home loans today

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Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at finder.com.au. Talk to him to find out more about home loans.

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ME Basic Home Loan - LVR <=80% Owner Occupier

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