Top tips to calculate home equity before refinancing

Your home equity determines how much you can borrow, what rates you can access, and whether you can pull cash out during a refinance.

Knowing the calculation before you speak to a lender saves time and stops you from applying for amounts that won't get approved. Equity is the difference between what your property is worth and what you owe on it, but the amount you can actually use is usually capped at 80% of the property's value to avoid lenders mortgage insurance.

How to calculate your current equity position

Subtract your outstanding loan balance from your property's current market value. If your home is valued at $650,000 and you owe $420,000, your equity is $230,000. That figure represents the ownership stake you hold in the property, but it doesn't mean you can access all of it when refinancing.

Most lenders let you borrow up to 80% of your property's value without paying lenders mortgage insurance. Using the same example, 80% of $650,000 is $520,000. Subtract the $420,000 you still owe, and your usable equity is $100,000. That's the amount you could potentially release as cash or use to secure a larger loan amount during a refinance.

Why lenders cap usable equity at 80%

Lenders mortgage insurance protects the lender if you default on a loan above 80% of the property's value. Staying under that threshold keeps your refinance costs lower and means you don't need to pay an insurance premium that can run into thousands of dollars.

If you need to borrow more than 80%, some lenders will approve it, but you'll pay lenders mortgage insurance and the rate may be higher. In our experience, most borrowers refinancing to access equity aim to stay at or below 80% to keep the application straightforward and the costs down.

When property valuations differ from your expectation

Lenders arrange their own valuation when you apply to refinance. If the valuer assesses your property at a lower figure than you expected, your usable equity shrinks. Consider a scenario where you assumed your home was worth $700,000 based on recent sales in your street, but the lender's valuer assesses it at $670,000. At 80%, that's a $24,000 reduction in the amount you can access. The loan amount you planned to refinance into might no longer be approved, or you may need to adjust how much cash you're releasing.

This is why running the numbers before applying matters. A loan health check can give you an indication of where your equity sits and whether your refinance goals are realistic based on current valuations in your area.

Using equity to consolidate debt or fund a purchase

Releasing equity during a refinance lets you pull cash out for other purposes without taking on a separate personal loan. If you owe $30,000 across credit cards and a car loan, you could refinance your mortgage to a higher loan amount, pay out those debts, and consolidate everything into one repayment at a lower interest rate.

As an example, someone with $120,000 in usable equity might refinance their $420,000 loan to $450,000, use $30,000 to clear high-interest debt, and still stay under the 80% threshold. The monthly repayment increases, but the overall interest cost often drops because the mortgage rate is lower than credit card and personal loan rates. It also improves cashflow by replacing multiple repayments with a single one.

This approach works well if you're confident you won't run up the credit cards again. If there's a pattern of accumulating debt, consolidating into your mortgage just shifts the problem and stretches it over 30 years.

How equity affects your refinance rate

The amount of equity you hold influences the interest rate a lender will offer. Borrowers with higher equity, closer to 30% or 40%, typically qualify for lower rates because the lender's risk is reduced. Someone refinancing with only 10% equity will face higher rates or might not be approved at all, especially if their income or credit history isn't strong.

If you're coming off a fixed rate and considering a refinance, checking your equity first tells you whether you'll have access to the sharpest rates available or whether you're still in a higher-risk bracket from the lender's perspective.

Calculating equity when you own an investment property

The same formula applies to investment properties. Subtract the loan balance from the property's value, then calculate 80% of that value to find your usable equity. If your investment property is worth $580,000 and you owe $390,000, your total equity is $190,000 and your usable equity is $74,000.

Many investors refinance to pull equity from one property and use it as a deposit on another. That strategy works if you're confident the rental income from the new property will cover the increased loan repayments on the original mortgage. The equity you release doesn't disappear; it gets added to your loan balance, so your monthly repayments will increase unless you extend the loan term or secure a lower rate.

If you're planning to access equity for investment purposes, the lender will assess your borrowing capacity based on both properties, including rental income and existing debts.

What happens if you need more than 80%

Some situations justify borrowing above 80%, such as funding urgent renovations or covering medical expenses. Lenders will assess these applications on a case-by-case basis, and you'll need to pay lenders mortgage insurance. The premium is usually added to your loan balance, which increases the amount you owe and the interest you pay over the life of the loan.

If your equity position is tight and you're refinancing to access funds, it's worth comparing the cost of lenders mortgage insurance against other options like a personal loan or a smaller cash-out amount. In some cases, waiting a few more months to pay down the mortgage or waiting for property values to rise can push you over the 80% equity mark and save thousands in insurance costs.

Running the calculation before you apply

Before you start a refinance application, gather your most recent mortgage statement to find your outstanding balance and look at recent sales in your area to estimate your property's value. Multiply that value by 0.8, subtract what you owe, and you'll have a working figure for your usable equity.

If the number is lower than you need, you have a few options: pay down more of the loan, wait for the property to increase in value, or adjust your plans to fit within the equity you currently have. If the number works, you can move forward with confidence that your refinance is likely to be approved at the loan amount you're targeting.

Call one of our team or book an appointment at a time that works for you to discuss your equity position and what refinance options make sense for your situation.

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