Can I refinance if my property value has dropped?

Yes. A fall in your property's value doesn't automatically stop you from refinancing, but it can make it more challenging.

Lenders look at more than your repayment history when assessing a refinance application. They also reassess the value of the property securing your loan. If your home is worth less than when you bought it, your refinancing options may become more limited, even if you've never missed a repayment.

Whether you can refinance depends on several factors, including your property's current value, the amount you still owe, your income, your repayment history and each lender's credit policy.

When you apply to refinance, your new lender is taking over your existing loan. Before approving the application, they need to understand the risk they're taking on.

Your property acts as security for the loan. If its value has fallen, the lender has less equity protecting the loan should the property ever need to be sold.

A lower valuation doesn't mean you've become a riskier borrower. It simply means the lender has less security against the amount you're borrowing.

That's why property values play such an important role in refinancing decisions.

When refinancing, lenders don't rely on your purchase price or an online property estimate. They usually order a new valuation to determine your property's current market value.

Depending on the lender and your circumstances, this could involve:

• an automated desktop valuation
• a physical inspection by a qualified valuer
• a combination of both.

Different lenders often use different valuers and valuation models. As a result, two lenders can place different values on the same property.

That valuation then determines one of the most important numbers in refinancing, your loan-to-value ratio (LVR).

Your loan-to-value ratio (LVR) compares the amount you still owe on your home loan with your property's current value.

LVR formula

Loan balance ÷ Property value × 100

For example:

• Current loan balance: $780,000
• Current property value: $900,000

LVR = 86.7%

The lower your LVR, the less risk the lender takes on, and the more refinancing options you generally have.

There isn't a single equity requirement for refinancing. Some borrowers can refinance with less than 20% equity, while others may struggle despite having more. It depends on the lender, your financial position and the level of risk they're willing to accept.

Before understanding how much equity you need, it helps to understand what equity actually is.

Equity is the difference between your property's current market value and the amount you still owe on your home loan.

For example, if your home is worth $900,000 and you owe $700,000, you have $200,000 in equity.

You build equity in two ways:

• by paying down your home loan over time
• by your property's value increasing.

The opposite is also true. If property prices fall, your equity shrinks—even if you've never missed a mortgage repayment.

Lenders use your equity to calculate your LVR, which is one of the biggest factors affecting whether they'll approve your refinance application.

As a general guide:

If you owe less than 80% of your property's value, you'll typically have access to the widest range of lenders and the most competitive home loan rates. In most cases, you won't need to pay Lenders Mortgage Insurance (LMI).

Refinancing is still possible, but your options may be more limited. Depending on the lender, you may need to pay LMI if you switch loans, and not all lenders will accept applications above 80% LVR.

Refinancing becomes more challenging. Fewer lenders offer loans at this level, and approval is likely to depend on factors such as your income, employment stability, repayment history and overall financial position.

If you owe more than your property is currently worth, you're in negative equity. At this point, refinancing with a mainstream lender can be difficult because the loan exceeds the value of the security.

Negative equity occurs when your outstanding loan balance is greater than your property's current market value.

For example, if you owe $620,000 but your property is now worth $600,000, you're in negative equity.

While the term sounds alarming, it doesn't automatically mean you're in financial trouble.

If you're comfortably making your repayments and don't need to sell your home, negative equity doesn't usually have an immediate impact on your day-to-day finances. The biggest challenge is that most lenders won't refinance a loan that's larger than the property's value.

The good news is that negative equity isn't always permanent.

As you continue making repayments, your loan balance reduces. If property values recover over time, your equity can gradually rebuild.

Being unable to refinance now doesn't mean you'll never be able to. Depending on your circumstances, you may have several options.

If another lender isn't willing to refinance your loan, ask your existing lender to review your interest rate. Many lenders will negotiate with existing customers, particularly if you've maintained a strong repayment history.

Making extra repayments reduces your loan balance over time. Even small reductions can improve your LVR and expand your refinancing options later.

Property markets move in cycles. If your property's value has temporarily fallen, waiting may allow your equity position to recover without requiring additional repayments.

Improving your income, reducing other debts or strengthening your savings can improve your borrowing profile when you're ready to refinance.

Every lender has different credit policies. A broker can identify lenders that may be willing to consider your application based on your LVR, financial position and property type, potentially saving you time and unnecessary credit enquiries.