How to Calculate Home Equity for Refinancing

What Home Equity Actually Means

Home equity is the difference between your property's current market value and the outstanding balance on your mortgage. If your property is worth $800,000 and you owe $500,000, you have $300,000 in equity. Lenders typically allow you to access up to 80% of your property value when refinancing, which means the maximum loan amount in this scenario would be $640,000. After repaying your existing $500,000 mortgage, you could access $140,000 in usable equity.

This calculation becomes relevant when you want to consolidate debt, fund renovations, or purchase an investment property without selling your home. The equity you have built through mortgage repayments and property value growth can work as security for additional borrowing.

How Lenders Calculate Usable Equity

Lenders use a loan-to-value ratio, or LVR, to determine how much you can borrow against your property. Most lenders cap refinancing at 80% LVR without requiring lenders mortgage insurance. Some lenders will go to 90% or higher, but this usually triggers additional costs and stricter serviceability requirements.

Consider a scenario where a property owner in South Perth holds a home valued at $950,000 with $420,000 remaining on the mortgage. At 80% LVR, the maximum loan amount is $760,000. Subtracting the existing mortgage leaves $340,000 in accessible equity. If that owner wants to release $200,000 for an investment property deposit, the new loan would be $620,000, sitting at 65% LVR, which leaves room for future borrowing if needed.

The formula is straightforward: multiply your property value by 0.80, then subtract your current loan balance. The result is your usable equity before costs. If you are planning to access equity for investment, understanding this calculation helps you determine how much deposit you can put towards your next purchase.

Why Property Valuation Affects Your Equity Position

Your equity depends entirely on an up-to-date property valuation. Lenders will order a valuation as part of the refinance process, and the result can differ from online estimates or recent sales in your area. If your property values below your expectation, your usable equity shrinks.

In South Perth, properties near the Swan River and around Angelo Street have seen strong capital growth over recent years, while units further from the foreshore may not have appreciated at the same rate. A valuation that comes in $50,000 lower than anticipated reduces your usable equity by $40,000 at 80% LVR, which can affect whether you have enough funds to proceed with your plans.

Some lenders accept automated valuations for straightforward refinances, while others require a physical inspection. If you are close to the 80% threshold, it may be worth discussing valuation options with your broker before proceeding with a formal application.

Calculating Equity When You Have Multiple Loans

If you have a mortgage split across multiple accounts, such as a fixed and variable portion, or if you hold a separate line of credit against the property, the calculation remains the same. Add up all loan balances secured against the property, then subtract that total from 80% of the property value.

In our experience, clients often overlook smaller loans or redraw balances when estimating equity. A property valued at $1,100,000 with a $600,000 mortgage and a $50,000 line of credit has $650,000 in total debt. At 80% LVR, the maximum loan is $880,000, leaving $230,000 in usable equity, not the $280,000 you would calculate if the line of credit was ignored.

This matters when applying to refinance your home loan, as the lender will account for every liability secured against the property, not just the primary mortgage.

How Refinancing Costs Reduce Available Equity

Refinancing involves costs that reduce the cash you can access from your equity. Discharge fees from your current lender, application fees with the new lender, valuation costs, and settlement fees can total between $2,000 and $4,000. If you are releasing equity, these costs are usually added to the new loan rather than paid upfront.

A borrower accessing $100,000 in equity to consolidate debt may only receive $96,500 after refinancing costs are deducted. If you are close to the 80% LVR limit, these costs can push you over the threshold and require lenders mortgage insurance, which adds another layer of expense.

When planning your refinance application, factor in these costs from the start so you know the true amount you will have available once settlement is complete.

When to Reassess Your Equity Position

Your equity grows in two ways: through regular mortgage repayments and through property value increases. If you have been in your home for several years and made principal repayments, or if the local market has strengthened, your equity position may be significantly different from when you last checked.

South Perth has benefited from infrastructure improvements, including upgraded schools and transport links, which have supported property values across the suburb. If you purchased or last refinanced several years ago, a current valuation may reveal more usable equity than you realised, which opens up options for debt consolidation or further investment.

A loan health check can confirm your current equity position and whether refinancing would deliver lower repayments, improved loan features, or access to funds without the need to sell.

Using Equity to Access a Lower Interest Rate

Refinancing with a lower LVR often gives you access to more favourable interest rates. Lenders price loans based on risk, and a lower LVR represents lower risk. If your equity has grown to the point where your LVR has dropped from 85% to 65%, you may qualify for a rate reduction even without switching lenders.

Consider a property owner who purchased at 90% LVR and has since paid down the loan and seen capital growth. The new LVR of 60% could open access to lender rate tiers that were not available at the time of purchase. This can deliver ongoing interest savings without requiring any cash out, making it a straightforward refinance to a lower rate.

If your fixed rate period is ending, checking your current equity position can help determine whether refinancing to a variable or new fixed rate would also deliver a lower rate tier based on your improved LVR.

How to Calculate Equity if You Want to Buy an Investment Property

When buying an investment property, you typically need a deposit of at least 20% to avoid lenders mortgage insurance. If the property you want to purchase is $600,000, you need $120,000 for the deposit, plus another $20,000 to $30,000 for stamp duty and settlement costs.

If your home is worth $1,000,000 and you owe $450,000, your maximum loan at 80% LVR is $800,000. After repaying the existing mortgage, you have $350,000 in usable equity, which is more than enough to cover the deposit and costs for the investment property. The new loan of $600,000 against your home would sit at 60% LVR, leaving you with a comfortable buffer.

This calculation assumes you can service both loans based on your income and existing commitments. Lenders assess your ability to meet repayments on the new total debt, not just the additional amount you are borrowing. Speaking with a broker before committing to a property search ensures you know exactly how much you can access and still meet serviceability requirements.

Call one of our team or book an appointment at a time that works for you to review your equity position and confirm how much you can release for your next property purchase.

Frequently Asked Questions