If your home is worth much more than you owe, you have equity. If your budget feels tight, you may want to use it. There are two main ways to do that: borrow more on a standard home loan through a refinance, or use a home equity release loan with no regular monthly repayments.
They work very differently. One asks you to pay as you go. The other lets the cost build up and asks you to pay at the end. Neither is free, and neither suits everyone. This guide explains how each works, how to work out how much equity you have, and how to compare them.
First, how much equity do you have?
Home equity is the difference between your property’s value and the amount you owe against it.
Equity = property value − amount owing
Here’s an example with illustrative numbers:
| Example | |
|---|---|
| Property value | $1,200,000 |
| Amount owing on your mortgage | $500,000 |
| Your home equity | $700,000 |
That’s the equity you own. It isn’t the same as the amount you can borrow. Standard lenders generally lend up to 80% of a property’s value without lenders mortgage insurance, so in this example:
| Example | |
|---|---|
| 80% of the property’s value | $960,000 |
| Minus the amount owing | $500,000 |
| Usable equity at 80% | $460,000 |
How much you can actually borrow also depends on your income, spending, debts and the lender’s policy. Lenders test your repayments at 3 percentage points above the actual rate (APRA), which is part of why borrowing power has dropped over the past year.
Values matter too. National home values have fallen seven months in a row, including a 1.2% fall in October (Cotality), and a lender’s valuation can come in lower than you expect. Equity moves with the market, so it’s worth checking where you stand now.
Option 1: Refinance or top up your home loan
With a refinance, you take a new loan, or increase your current one, for more than you owe. The extra is available as cash, and you pay the whole new balance back through regular repayments.
- Repayments: Regular principal and interest repayments, usually monthly, from day one.
- Interest: Charged on the balance and paid as part of each repayment.
- Approval: Based on your income, spending and debts, so you need room in your budget for the higher repayment.
- Equity over time: If you pay principal and interest, your balance goes down and your equity rebuilds.
This can suit you if your cash flow can handle the higher repayment and you want to pay down the debt as you go. It’s also a chance to check your rate. Our guide on whether refinancing is worth it shows how to work out your break-even point.
Option 2: Home equity release (a no monthly payments loan)
A home equity release loan lets you borrow against your home’s equity without making regular monthly principal or interest repayments during the life of the loan.
- Repayments: No regular monthly principal or interest repayments.
- Interest: Simple interest, calculated on the amount you originally borrowed, not on interest that’s already been added.
- Term: No predetermined end date. The loan is generally repaid when you sell, refinance or choose to repay, or when another repayment event in the contract occurs.
- Structure: It may be a first mortgage, replacing an existing loan, or a second mortgage behind an eligible current loan.
It may suit you if you have substantial equity, want funds without selling your home, want to avoid another regular monthly payment, or are limited by traditional income-based borrowing requirements. Approval remains subject to eligibility, property requirements, credit assessment and responsible lending obligations.
The trade-off is what builds up. The amount payable at the end may include the original loan, accumulated simple interest, lender fees and charges, and a deferral fee linked to an agreed share of any increase in your property’s value, where applicable. Because the balance grows over time, the equity left in your home can shrink. We explain this in detail in our guide to how home equity release works and what it costs.
Side by side
| Refinance or top up | Home equity release | |
|---|---|---|
| Regular repayments | Yes, from the start | No regular monthly principal or interest repayments |
| How interest works | Charged and paid through your repayments | Simple interest added to the balance |
| Cash flow today | Repayments go up | No new regular repayment |
| Cost over time | Paid as you go | Builds up and is payable at the end, with any fees |
| Equity over time | Can rebuild as you repay principal | Can shrink as the balance grows |
| Approval | Credit assessment, including your income and spending | Subject to eligibility, property requirements, credit assessment and responsible lending obligations |
Other options to consider
Neither option may be right, or you might want to weigh them against others. ASIC’s MoneySmart suggests looking at alternatives before accessing home equity, such as:
- Selling and downsizing, after weighing up the costs of selling and buying
- Checking your eligibility for government support, such as the Age Pension or other benefits
- A no interest loan for a small amount to cover essentials
You can read more in MoneySmart’s guide to reverse mortgages and home equity release, which also has a calculator showing how your equity may change over time.
How to compare them properly
The cheapest option on paper isn’t always the best one for you. When you compare, ask for each option to be modelled over five, ten and fifteen years, and look at:
- The regular repayment and whether your budget can handle it with a buffer
- The total you’d owe after five, ten and fifteen years, including fees
- The equity you’d have left in each case, using a few different property values
- How long you expect to hold the loan, since time makes the biggest difference to a loan that builds up
- What happens at the end: which repayment events apply, and what it would cost to repay early
A broker can run both side by side, and can explain how each option could affect your future borrowing, your estate and any government payments.
Common questions
Is home equity release better than refinancing? It depends on your cash flow, how long you’d hold the loan and how much equity you want to keep. A standard loan with regular repayments asks more of your budget now. Equity release may ease cash flow now, but the balance grows. Ask for both to be modelled side by side.
Can I use home equity release if I can’t get a refinance? Approval for each option depends on its own criteria, including eligibility, property requirements and credit assessment. A broker can tell you what’s likely to be available.
Can I release equity if I still have a mortgage? Possibly. The loan may be a first mortgage that replaces your current one, or a second mortgage that sits behind an eligible current home loan.
What can I use the money for? Funds may be used for one purpose or a combination of eligible needs, such as reducing a mortgage, consolidating debts, renovating, buying your next home, helping family, starting a business, education costs or personal expenses.
Will I still own my home? Yes, you still own it, but the loan is secured against your property and must be repaid when a repayment event occurs.
Talk to an hfinance broker
The hfinance team compares options across 50+ lenders, and can model a refinance and a home equity release side by side so you can see the costs clearly. Learn more on our home equity release page, or book a call to talk through your situation.
This article is general information only and does not take into account your personal financial situation or objectives. Figures are illustrative. Equity release involves interest, fees and charges, and the amount owing grows over time and reduces the equity in your property. Approval is subject to eligibility, property requirements, credit assessment and responsible lending obligations. Speak with an hfinance broker, and consider independent financial and legal advice, before making any decision.