Cash-out refinancing: How much equity can you access?

Cash-out refinancing lets you replace your existing loan with a larger one and take the difference as cash. For example, if you owe $500,000 on your home and refinance to a new $600,000 loan, you can access the additional $100,000 in cash.

Cash-out refinancing is also called an equity release loan, as you borrow against the equity in your home. The new loan uses your property as security, just like your existing home loan. You then repay the larger loan over time.

You can complete cash-out refinancing with your current lender or switch to another lender. Look at the interest rate, total fees, and features to ensure the new loan suits your long-term budget.

Equity is the difference between the market value of your property and the amount you owe on it. If your property is worth $750,000 and you owe $500,000, you have $250,000 in home equity.

Equity in your home provides a resource you can tap into when needed. Your equity grows as you repay your loan balance, but it can rise or fall as property values change due to market forces.

To access cash, you must have positive equity in your home. Even then, lenders will not let you borrow the full difference. Most lenders cap borrowing at 80% of the property's total value. The amount you can borrow from your home equity is called usable equity. Lenders generally calculate usable equity as:

Usable Equity = (Property Market Value x 0.80) - Current Loan Balance

Equity release, also known as cash-out refinancing, usually involves refinancing your existing home loan for a larger amount and accessing the difference as cash. An equity home loan, also known as a home loan top-up, generally involves increasing your existing loan or taking out an additional loan against the equity in your property.

You can use cash-out refinancing for a range of purposes, but whether it makes sense depends on what you're using the money for and whether taking on additional home-loan debt is worthwhile.

You can use the equity in your home to fund renovations if you don't have enough savings. However, not all renovations add the same amount of value to your property. Think about why you're renovating, how much value the work will add to your home or your lifestyle, and whether that benefit justifies the additional interest you'll pay on the money you borrow.

Some borrowers use the equity in their existing home towards the deposit or other costs of buying an investment property.

This allows you to use existing equity rather than saving a separate deposit from your income. But it also increases the amount you owe against your existing home, so you need to consider the repayments and the risks of taking on additional debt.

You may also be able to use home equity to pay off other debts, such as personal loans or credit cards. This can reduce the interest rate and simplify your repayments, but it doesn't reduce the amount you owe.

When you consolidate debt, you're effectively moving the debt into your home loan and potentially securing it against your property. This strategy may be helpful when moving high interest rate debts, like a credit card debt, into your home loan that is likely to have a much lower rate of interest. However, you'll also end up paying a short term debt over a much longer period which can eventually cost you more. Make sure to run the numbers and see which strategy works better for you.

Cash-out refinancing can also be used for other significant expenses, subject to your lender's policies and the purpose of the borrowing. Depending on your lender, you may be able to use the cash for a holiday, wedding expenses or medical payments. But should you do that depends on the urgency of your requirement and your capacity to repay the loan on time. Just because you can borrow against your home doesn't mean you should.

If you have savings available, compare the two options rather than automatically borrowing. Using savings avoids paying interest on the amount you withdraw, but you may also want to retain an emergency buffer.

The right choice depends on your overall financial position, not simply which option gives you the lowest monthly repayment.

Yes. When you apply for a cash-out refinance or equity release, you will usually need to explain how you intend to use the money. Your lender may ask for supporting documents, particularly if you are borrowing a large amount. For example, you may need to provide renovation quotes or information about an investment purchase.

Lenders have different policies for different purposes. Cash-out for renovations, debt consolidation, investment or general personal spending may not be assessed in the same way, and some lenders may restrict certain uses or impose borrowing limits.

As a result, the amount you can access depends on more than your estimated usable equity. Your income, expenses, existing debts, LVR and the lender’s cash-out policy may also affect the amount you can borrow. Lenders must also take reasonable steps to verify your financial position and assess whether the credit is suitable and affordable.

Some lenders allow cash-out refinancing for business purposes, but their rules vary. You may need to provide details about how you plan to use the money.

Interest may be tax deductible when the funds are used for business purposes, but the rules can be complex. Check with a tax adviser before proceeding.

Cash-out refinancing helps you access property equity without selling your home. However, it increases the total debt secured against your property, so you must weigh the benefits against the risks.

Potential benefits

Potential drawbacks

Cash-out refinancing can make sense if you have sufficient equity, can afford the larger loan and have a clear reason for borrowing. But having usable equity doesn't mean you should automatically use it.

Before you apply, check that:

• You can afford the larger loan. Make sure the additional borrowing fits comfortably within your budget, including if interest rates or your circumstances change.
• You have a clear purpose for the cash. Know how much you need and what you intend to use it for.
• You've compared your options. Look at the interest rate, fees, features and total cost of the new loan, rather than focusing only on how much cash you can access.
• You've considered alternatives. You may be able to achieve the same goal without borrowing against your home.

For example, if you're looking to refinance partly because you need a relatively small amount of extra cash, check whether your existing lender offers a loan increase or whether another option could meet your needs without a full refinance.

Similarly, if you're refinancing to consolidate debt, compare the cost of the new loan with your existing debts and consider how quickly you will repay the additional borrowing.

The fact that a lender is willing to let you access your equity doesn't necessarily mean you should. Borrow only what you need, for a purpose that justifies taking on the additional debt.

Both cash-out refinancing and reverse mortgages let you access some of the equity in your home, but they are designed for different situations. The biggest difference is how you repay the money and how the loan balance changes over time.

With cash-out refinancing, you replace or increase your existing home loan and borrow additional money against your property.

For example, if you owe $400,000 and refinance to a $500,000 loan, you could potentially receive $100,000 as cash, subject to the lender's valuation, lending criteria and your ability to service the larger loan.

You then make regular repayments on the larger loan, usually including principal and interest. Because you're making repayments, your loan balance can gradually reduce over time.

Cash-out refinancing may be suitable if you have sufficient income to service the larger loan and want to use some of your equity for a specific purpose, such as renovating, consolidating higher-interest debt or funding an investment.

A reverse mortgage is a different type of loan that allows eligible homeowners, generally older Australians, to borrow against their home without making the same regular principal-and-interest repayments required by a standard mortgage. Instead, the interest is generally added to the loan balance.

This means the amount you owe can increase over time, particularly if you continue to draw on the loan or don't make repayments.

The loan is generally repaid when you sell the property, move out permanently or another event specified in the loan contract occurs. Because the debt can grow over time, a reverse mortgage can reduce the equity you or your estate ultimately have in the property.

The right option depends heavily on your circumstances.

Don't choose between the two based simply on how much cash you can access. If you can afford regular repayments, a standard cash-out refinance may allow you to maintain greater control over the loan balance.

If you're an older homeowner with limited income and need to access your home equity without taking on regular mortgage repayments, a reverse mortgage may provide an alternative.

But you should consider what happens to the loan over time. With a reverse mortgage, interest can compound and reduce the equity left in your home. This can affect how much you or your estate ultimately receive when the property is sold.

Also consider whether you need to access all your available equity. Borrowing less can reduce the long-term cost and preserve more of your equity.

Cash-out refinancing and reverse mortgages solve different problems. The right choice depends not only on how much equity you have, but on your age, income, repayment capacity, purpose for borrowing and how you want to use or preserve your home equity over the long term.