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

Using the same example, on a $750,000 property with $500,000 owing, usable equity is ($750,000 × 0.80) − $500,000 = $100,000. This is less than the $250,000 in total equity, because the 80% cap limits how much of it you can actually access.

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.

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.

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.

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.

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 be useful when you have a clear reason for borrowing and can comfortably afford the additional debt. Before you proceed, consider what you need the money for, how much you need and what it will cost you.

Work out what the extra borrowing will add to your repayments and whether it fits comfortably within your budget.

For example, borrowing an additional $100,000 over 25 years at 6.70% p.a. would add roughly $688 a month to your repayments, assuming principal and interest repayments.

Don't just look at whether you can afford the repayments today. Consider how your budget would cope if your income fell, expenses increased or interest rates changed.

You may have $200,000 of usable equity, but that doesn't mean you need to access all of it. Work out what you actually need for the purpose you're borrowing for. Borrowing less means lower repayments and less interest over time.

Before using your home equity, consider whether there is another way to achieve the same goal. For example, if you need a relatively small amount, your existing lender may offer a loan increase or top-up without requiring you to refinance the entire mortgage.

If you're consolidating debt, compare the cost of refinancing with your existing debts and consider how quickly you'll repay the additional borrowing.

Finally, look beyond the amount of cash you'll receive.

Consider the interest you'll pay, refinancing costs, the repayment period and what the money will achieve.

If you're borrowing to renovate, for example, consider whether the improvement to your home or lifestyle justifies the additional debt. If you're consolidating high-interest debt, consider whether the lower rate will actually save you money once the new repayment period is taken into account.

Having equity in your home gives you an option. It doesn't mean you need to use it. The right amount to borrow is the amount that serves a worthwhile purpose and leaves you comfortable with the debt you're taking on.