You can release equity from your home without taking on more debt than you need. The key is to decide what the money is for before you speak to a lender.
For homeowners in Nedlands, the usual reasons are a renovation, an investment purchase or clearing other debts. Each one calls for a different structure. Here are the mistakes we see most often and how to avoid them.
What Is Usable Equity and How Do You Work It Out?
Usable equity is the amount you can borrow against your home, on top of your current loan, before reaching the lender's maximum loan to value ratio (LVR). To estimate it, multiply your property value by the lender's maximum LVR, then subtract your current loan balance.
The maximum LVR differs between lenders and depends on your circumstances, so the result is only an estimate until a lender values your property. A common mistake is to assume the gap between your home's value and your loan is all available. It is not. Lenders also test whether your income can support the higher repayments, so it helps to check your borrowing capacity early.
The trade-off is that a higher LVR can limit your choice of lenders and may add costs, depending on the lender.
Common Mistake: Borrowing More Than the Purpose Needs
Borrowing the full amount available is a mistake because you pay interest on every dollar, whether or not you use it. A top up loan sized to the actual project keeps repayments lower and leaves some equity untouched for later.
Consider a Nedlands homeowner planning a bathroom and kitchen update. Her lender says she could borrow up to $150,000, but her builder's quote is $60,000. She is tempted to take the full amount to be safe.
Instead, she works with a mortgage broker to refinance her home loan and borrow $60,000 more, with a small buffer added only after a second quote. She keeps the remaining equity available. At the illustrative rate of 6.75% p.a. over 25 years, the extra $60,000 adds about $415 a month to her repayments. That is a figure she can check against her budget before she signs. Borrowing $150,000 would have more than doubled that increase for money she had no plan to spend.
The trade-off is that if costs blow out, she would need to apply for more funds later. A modest buffer handles most of that risk. Your actual rate will depend on your lender and your LVR, and a refinance calculator can help you test the numbers.
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Rolling Short-Term Debts Into Your Mortgage Without a Plan
Using equity for debt consolidation can lower your monthly outgoings, but it stretches those debts over the life of your home loan. A car loan or credit card that would have been cleared in a few years can end up costing more in total if it sits in a 25 or 30 year loan.
The repayment drop looks appealing, yet the longer term is the cost. If you go this way, you can make extra repayments on the portion that replaced the old debts so it clears sooner. Our debt consolidation loans page explains the options in more detail.
This only works if the habits that created the debt have changed. Otherwise, you may clear the cards and then build up new balances on top of a larger mortgage.
Do Refinancing Costs and Break Costs Matter?
Yes, they can. Refinancing may involve discharge fees from your current lender and application or valuation costs with the new one. If you are on a fixed rate, breaking it early can add a further cost.
Check your current loan documents before you apply. If your fixed term is close to ending, it can make sense to wait, and our fixed rate expiry page covers that timing. The point is to weigh these costs against what you gain. A lower rate or a more suitable loan structure should outweigh the upfront costs, and if it does not, staying put may be the sensible choice.
Mixing Personal and Investment Borrowing in One Loan
If you borrow against your home to buy an investment property, keep that borrowing in a separate loan split from any personal spending. A single combined balance makes it harder to see how much of the interest relates to the investment.
The tax treatment of interest depends on how the borrowed funds are used, so speak to your accountant before you set up the loan. A clear split also makes it easier to adjust repayments later. If you already hold investment property, our investment loan refinancing page is a useful next stop.
Equity in a Nedlands Home Is Only Useful If the Loan Suits You
Nedlands is a well-established suburb on the Swan River, close to the QEII Medical Centre. Homeowners who have held property for some time may have built up equity. That equity is a useful resource, but how you use it matters more than how much you have.
It can be worth running a loan health check before you decide, so you know whether your current loan still suits you. You can also read more about our local mortgage broker in Nedlands service.
Call one of our team or book an appointment at a time that works for you, and we will help you work out how much equity you can use and the right way to access it.
Frequently Asked Questions
How do I work out my usable equity?
Multiply your property value by the lender's maximum LVR, then subtract your current loan balance. The result is an estimate until the lender values your property.
Is it a good idea to borrow all of my available equity?
Usually not. You pay interest on everything you borrow, so it is generally wiser to borrow what your purpose needs, plus a modest buffer.
Can I use equity to consolidate debts?
Yes, but spreading short-term debts over a long home loan term can increase the total interest you pay. Making extra repayments on that portion can help clear it sooner.
What costs should I expect when I refinance to release equity?
These can include discharge fees, application or valuation costs and, on a fixed rate, break costs. Check your loan documents and compare these costs with what you would gain.
