Calculating Home Equity: The Ins and Outs of Refinancing

Your home equity is the difference between what your property is worth and what you owe on it.

That number determines whether you can refinance to a lower rate, access funds for an investment, or consolidate debt. Knowing how to calculate it accurately means you can approach a refinance with clarity about what's actually available to you and what a lender will consider when assessing your application.

How Home Equity Is Calculated

Subtract your current loan balance from your property's current market value. If your property is valued at $850,000 and you owe $520,000, your equity is $330,000. That figure represents what you own outright. However, what you can access when refinancing is typically less than that total amount because lenders cap how much they'll lend against the property's value. Most lenders will allow you to borrow up to 80% of the property value without needing lenders mortgage insurance, which in this scenario would be $680,000. With an existing debt of $520,000, you could access up to $160,000 in usable equity while staying within that 80% threshold.

Why Accurate Valuation Matters More Than You Think

The equity calculation depends entirely on what a lender believes your property is worth, not what you paid for it or what a real estate agent suggests it might sell for. When you apply to refinance, the lender will arrange a valuation, often a desktop assessment or a kerbside inspection rather than a full appraisal. If that valuation comes in lower than expected, your usable equity shrinks immediately. Consider a scenario where you assume your property is worth $950,000 based on recent sales in your street, but the lender's valuation returns at $900,000. That $50,000 difference reduces your usable equity by the same amount, which could mean the difference between proceeding with an investment purchase or needing to adjust your plans. We regularly see this in markets where values have plateaued or softened slightly. A loan health check before you commit to a purchase or refinance application can help clarify what a lender is likely to accept.

The 80% Threshold and What It Means for Your Options

Staying at or below 80% loan-to-value ratio keeps your refinance application straightforward. Above that threshold, you'll need to pay lenders mortgage insurance, which adds cost and may not be recoverable if you're refinancing purely to access a lower rate. In situations where you're accessing equity for an investment or debt consolidation, moving above 80% can still make sense, but you should understand the trade-off. If your property is valued at $1,000,000 and you owe $650,000, borrowing up to 80% gives you $800,000 in total lending, meaning $150,000 in accessible equity. Pushing to 85% would give you $850,000 in total lending, unlocking an additional $50,000, but you'd pay lenders mortgage insurance on the portion above 80%. Whether that cost is justified depends on what you're using the funds for and the return you expect from that investment.

How Offset and Redraw Balances Affect Equity

Your equity calculation should account for any funds sitting in an offset account or available in redraw. An offset account doesn't reduce your loan balance on paper, but it reduces the interest you're charged, which means your actual debt position is lower than the formal loan balance suggests. If you have $50,000 in an offset and your loan balance is $600,000, your effective debt is $550,000, but a lender will still assess your equity based on the $600,000 figure unless you choose to pay down the loan before refinancing. Redraw works differently because those funds have already reduced your loan balance, so they're already reflected in your equity. If you've made extra repayments and your loan balance has dropped from $600,000 to $550,000, that $50,000 is already counted as equity. When you're planning to access equity for investment, clarifying whether your offset balance should be redeployed or left in place can change the structure of your refinance.

Calculating Usable Equity When You're Coming Off a Fixed Rate

If your fixed rate period is ending and you're considering a refinance, the equity position you held when you first fixed may have shifted. Your loan balance has reduced through regular repayments, and your property value may have changed depending on market movements since you locked in that rate. A property purchased at $700,000 with a $560,000 loan three years ago might now be valued at $780,000 with a loan balance of $520,000 after regular repayments. That's $260,000 in equity, up from $140,000 at the time of purchase. If you're staying at 80% loan-to-value, you now have access to $104,000 in usable equity, compared to zero when you first bought. This shift is why reviewing your position at the end of a fixed term is worth doing even if you're not planning to move properties or make a major purchase. You may have options now that weren't available when you first locked in your rate.

When the Numbers Don't Support a Refinance

Sometimes the equity calculation shows that refinancing isn't viable yet. If your property value has declined or if you purchased recently with a high loan-to-value ratio, you may not have enough equity to refinance without paying lenders mortgage insurance or covering a shortfall. In a scenario where you bought at $650,000 with a 10% deposit and your property is now valued at $630,000, your equity has turned negative on paper. You owe more than the property is currently worth, which means refinancing to access funds isn't an option, and even refinancing to a lower rate may require you to cover the difference between your loan balance and 80% of the current valuation. If you're in this position, waiting until your loan balance reduces further or property values recover may be the only path forward. If your goal is to lower your rate rather than access funds, some lenders may still refinance you at a higher loan-to-value ratio, but your options will be limited and the rates may not be as competitive.

Knowing how much equity you hold and what portion of that is accessible gives you a clear starting point for any refinance conversation. If you're considering a refinance or want to understand your current position, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions