What Not to Do When Refinancing to Release Equity

Refinancing to release equity means replacing your current home loan with a larger one, then using the difference for renovations, investment, debt consolidation, or other purposes. The mistake most Altona homeowners make is treating it like a simple rate switch when lenders assess it as new borrowing with stricter serviceability tests.

Applying Without Knowing Your Usable Equity

Your usable equity is not the same as the difference between your property value and your loan balance. Lenders typically allow you to borrow up to 80% of your property value without paying lenders mortgage insurance, which means your available equity stops well short of the total equity you hold. In Altona, where properties near the beach or Pier Street precinct tend to hold value differently than homes closer to Kororoit Creek Road, a recent valuation ordered by the lender will determine how much you can actually access. If you apply assuming a certain property value based on recent sales in your street, but the valuer comes in lower, your application stalls or you borrow less than you planned. Work out your loan to value ratio before you lodge anything.

Borrowing the Maximum Without Testing Serviceability First

Just because a lender will let you borrow up to 80% LVR does not mean you can service that higher loan amount. Lenders apply buffers and assessment rates that sit well above the actual interest rate you will pay, and they include all your existing debts, living expenses, and any rental income at a discounted rate. Consider a homeowner in Altona who owns a three-bedroom weatherboard near Altona North and wants to release equity to buy an investment property. They owe $420,000 on a property valued at $850,000, giving them around $260,000 in accessible equity at 80% LVR. But when the lender runs serviceability, their household income of $140,000 combined with two car loans and childcare costs means they can only borrow an additional $180,000. They adjust their investment strategy, target a lower-priced property, and the loan settles without issue. The alternative would have been a declined application and wasted valuation fees.

Ignoring Discharge and Application Fees When Switching Lenders

Refinancing to release equity almost always involves moving to a new lender, which means paying a discharge fee to your current lender, application fees to the new one, valuation costs, and sometimes settlement or legal fees. These can add up to $1,500 or more depending on your loan structure. If you are releasing a smaller amount of equity, say $30,000, those fees eat into the funds you actually receive. In some cases it makes sense to ask your current lender if they will increase your loan without a full refinance, which avoids discharge fees entirely. Not every lender will agree, and not every situation suits it, but it is worth checking before you commit to a full refinancing process.

Using Equity for Purposes That Do Not Add Value or Income

Lenders want to know what you are using the funds for, and while they will approve equity release for most purposes, using it to pay off consumer debt without changing your spending habits just shifts the problem onto your mortgage. If you consolidate $40,000 in credit cards and personal loans into your home loan, your monthly repayments might drop, but you have now turned short-term debt into a 30-year obligation. That $40,000 could cost you more than double over the life of the loan if you only make minimum repayments. Equity used for renovations that lift your property value, or for purchasing an investment property that generates rental income, works in your favour. Equity used to cover ongoing lifestyle expenses does not.

Not Comparing Loan Features Beyond the Interest Rate

When refinancing to access equity, many homeowners focus only on securing a lower interest rate and miss loan features that matter more over time. Offset accounts, redraw facilities, and the ability to make extra repayments without penalty all influence how quickly you can pay down the increased loan balance. Some lenders also cap how much you can redraw once you have made extra repayments, which limits your flexibility if you need access to those funds later. A loan that sits 0.15% higher in rate but includes a full offset account linked to your savings can save you more in interest than a lower rate with no offset, depending on how much you keep in that account.

Applying Before Your Income or Employment Is Clear

If you are self-employed, between jobs, or waiting for a pay rise to show on your payslips, your serviceability assessment will reflect your current position, not your expected one. Lenders assess income based on what they can verify right now, which means recent tax returns for self-employed borrowers or payslips from the past few months for PAYG employees. Applying before that income is documented just delays your approval or results in a lower borrowing capacity. Wait until your tax return is lodged, your new salary is showing on payslips, or your probation period is complete if that timing works for your plans.

Skipping a Loan Health Check Before You Start

Your current loan might have features, rates, or conditions that influence whether refinancing makes sense at all. If you are on a fixed rate and still within the fixed term, break costs can run into the thousands depending on how much rates have moved since you locked in. If your current loan has already been refinanced in the past 12 months, some lenders will not touch it. A loan health check before you apply identifies these issues early and lets you plan around them rather than discovering them mid-application.

Refinancing to release equity is one of the most useful tools available to homeowners in Altona, but it only works when the numbers, timing, and structure align with what you actually need the funds for. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions