How to Calculate Home Equity When Refinancing

Your home equity calculation determines how much you can borrow when refinancing and whether lenders will approve your application.

Equity is the portion of your property you own outright, calculated by subtracting your outstanding loan amount from your property's current market value. Most lenders allow you to access up to 80% of your property's value when refinancing, though some will extend to 90% with lenders mortgage insurance. The calculation itself is straightforward, but the valuation and serviceability assessment that follow determine whether your refinance proceeds.

The Standard Equity Calculation

Subtract your current loan balance from your property's current value, then calculate what percentage of that value you owe. If your Preston property is valued at $750,000 and you owe $450,000, your equity is $300,000 or 40% of the property's value. When refinancing, lenders typically allow you to borrow up to 80% of the property value, meaning you could access $600,000 in total borrowing. After repaying your existing $450,000 loan, you would have $150,000 available to draw as cash, consolidate other debts, or use for investment purposes.

The 80% threshold exists because lenders require a 20% buffer to protect against market fluctuations and potential default. Borrowing above 80% is possible, but you will pay lenders mortgage insurance, which can add several thousand dollars to your refinance costs. For most clients in Preston looking to access equity, staying at or below 80% keeps costs down and approval straightforward.

Property Valuation Drives the Numbers

Your equity calculation depends entirely on what your property is currently worth, not what you paid for it. Lenders will organise a formal valuation as part of the refinance process, typically a desktop assessment or kerbside inspection rather than a full internal inspection. If your property has increased in value since you purchased, your equity position improves. If values have softened or remained flat, your equity may be lower than expected.

In Preston, properties near High Street and the Bell Street precinct have seen steady value growth due to proximity to transport and retail amenity. A property purchased several years ago in these areas will likely show strong equity growth, while properties further from these corridors may have experienced more modest gains. The valuation will account for recent comparable sales in your immediate area, property condition, and any renovations or improvements you have completed.

If the valuation comes in lower than expected, your available equity shrinks. Consider a scenario where you believe your property is worth $750,000 based on recent sales, but the lender's valuer assesses it at $700,000. Your equity drops from $300,000 to $250,000, and your maximum 80% borrowing capacity falls from $600,000 to $560,000. After repaying your existing $450,000 loan, you would have $110,000 available instead of $150,000. This $40,000 difference can significantly affect whether the refinance achieves your goals.

How Serviceability Affects What You Can Access

Calculating equity tells you the theoretical amount you could borrow, but serviceability determines whether the lender will approve that amount. Even if you have $150,000 in available equity, the lender must assess whether you can service the higher loan amount based on your income, expenses, and existing commitments. Refinancing to access equity increases your loan balance, which increases your minimum monthly repayments.

Lenders apply a serviceability buffer, typically adding 3% to the current variable rate and calculating whether you could still afford repayments at that higher rate. They also apply a benchmark for living expenses, which may exceed your actual spending. If you earn $120,000 annually and have no other debts, servicing a $600,000 loan is usually manageable. If you have car loans, personal loans, or credit card limits, those commitments reduce your borrowing capacity even if the equity is available.

In practice, we regularly see clients with sufficient equity who cannot access the full amount because their income does not support the higher loan balance. If this applies, consolidating other debts into the mortgage can improve serviceability by reducing monthly commitments, though it extends the repayment term for those debts. Alternatively, reducing the amount you draw or having a partner included on the application can resolve the shortfall. Your application may require proof of income, recent payslips, tax returns, and a list of all current liabilities before a formal assessment can proceed.

Refinancing to Access Equity for Investment

Many Preston clients refinance specifically to access equity for a deposit on an investment property or renovation. The calculation remains the same, but the purpose affects how the funds are structured and whether the interest remains tax-deductible. If you are refinancing to access $100,000 for an investment property deposit, that portion of the loan should be split into a separate account so the interest on that $100,000 remains deductible against your investment income.

Consider a borrower who owns a $750,000 property in Preston with a $400,000 loan balance. They have $350,000 in equity and want to access $100,000 to purchase an investment property. Refinancing to $500,000 gives them the funds, but if the entire $500,000 is in one loan account, only the interest on the original $400,000 relates to their owner-occupied property. The interest on the additional $100,000 relates to the investment, and those portions must be tracked separately for tax purposes. Splitting the loan into two accounts at the time of refinance keeps the records clear and simplifies tax reporting. For clients considering this approach, reviewing investment loans alongside the refinance ensures the structure supports both properties appropriately.

What Happens When Equity Is Marginal

If your equity sits close to the 80% threshold, small shifts in valuation or loan balance can determine whether your refinance proceeds. A borrower with a $650,000 property and a $520,000 loan has 20% equity, which is exactly the 80% loan-to-value ratio most lenders require. Any further borrowing pushes them above that threshold and into lenders mortgage insurance territory, which can add $10,000 or more to the refinance cost.

In this scenario, paying down the loan by $20,000 to $30,000 before refinancing can bring the loan-to-value ratio back under 80% and avoid the insurance cost. Alternatively, if the property valuation comes in higher than expected, the equity cushion increases without requiring additional repayments. Timing the refinance to allow for a few more months of principal repayments or waiting for a stronger valuation environment can shift the numbers in your favour. If you are refinancing to access a lower rate rather than draw funds, ensuring your loan-to-value ratio stays under 80% keeps approval straightforward and avoids unnecessary costs.

Call one of our team or book an appointment at a time that works for you to calculate your available equity and structure your refinance to suit your situation.

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