Can You Refinance If You Have Less Than 20% Equity?

You may be able to refinance a home loan with less than 20% equity, but the available options can be more limited. A lender will generally consider your loan-to-value ratio, property valuation, income, expenses, existing debts and overall credit application. Where the loan exceeds certain LVR thresholds, lenders mortgage insurance or other lender requirements may apply. Having less than 20% equity does not automatically prevent refinancing, but approval, costs and lending conditions vary between lenders.

What Does Having Less Than 20% Equity Mean?

Home equity is broadly the difference between the value of your property and the amount you still owe against it. For example, if a property is valued at $600,000 and the home loan balance is $510,000, the homeowner has approximately $90,000 in equity based on those figures. This represents 15% of the property’s value. From a lender’s perspective, the related measurement is usually the loan-to-value ratio, commonly known as LVR. In this example, a $510,000 loan against a $600,000 property represents an LVR of approximately 85%. The lender’s own valuation, rather than a homeowner’s estimate of market value, will generally be relevant when calculating LVR for a refinancing application.

Is 20% Equity Required to Refinance?

Not necessarily. Having at least 20% equity can affect the refinancing options and costs available, but it is not a universal requirement for every home loan. Some lenders may consider refinancing applications at higher LVRs, subject to their lending criteria and the borrower’s circumstances. Additional requirements, costs or restrictions may apply. This means having less than 20% equity does not automatically rule out refinancing, but it can make the assessment more complex.

Why Is 20% Equity Often Discussed?

The 20% equity figure is commonly discussed because it broadly corresponds to an LVR of 80%. When borrowing above certain LVR thresholds, lenders may apply additional risk requirements. Depending on the lender and application, this can include lenders mortgage insurance, commonly known as LMI. However, lending policies differ, and an 80% LVR should not be treated as a universal dividing line between an application being approved or declined.

What Is Lenders Mortgage Insurance?

Lenders mortgage insurance is insurance that protects the lender against certain losses if a borrower defaults and the sale of the property does not recover the amount owing. Importantly, LMI generally protects the lender rather than the borrower. Where LMI applies, the premium can represent a significant additional cost. The amount can depend on factors such as the loan amount, LVR and lender or insurer requirements. Refinancing borrowers should understand whether LMI applies to the proposed new loan and how the premium would be paid or incorporated into the lending arrangement, where permitted. For more information, read Everything You Need to Know About LMI (Lenders Mortgage Insurance).

Could You Pay LMI Again When Refinancing?

Potentially. If LMI was paid when the original home loan was established, that does not necessarily mean it transfers to a new lender when refinancing. A new lender may have its own LMI requirements. If the new loan falls within a range where LMI is required, another premium could potentially apply. This can materially affect the cost of refinancing and should be considered when comparing the existing loan with a proposed new loan.

A New Property Valuation Can Change Your Equity Position

Your equity position is not determined solely by how much of the original loan you have repaid. Changes in property value can also affect equity. If the lender’s valuation is higher than the property’s value when the original loan was established, the resulting LVR may be lower. Conversely, if the property is valued below expectations, the LVR may be higher. A particular valuation outcome cannot be guaranteed, even if comparable properties have recently sold for particular prices. You can also read What Happens If Your Property Valuation Comes in Lower Than Expected?.

Your Financial Position Still Matters

Equity is only one part of a refinancing application. A lender will generally assess your current financial circumstances when considering a new home loan. This can include income, living expenses, existing debts, credit limits and other financial commitments. The lender may also review your repayment history and other relevant information as part of its credit assessment. Having sufficient equity does not guarantee refinancing approval, just as having less than 20% equity does not necessarily mean an application will be declined.

Serviceability Can Affect Refinancing

A borrower’s ability to meet the proposed loan repayments is an important consideration. Even if repayments have been maintained successfully on the existing home loan, a new lender generally conducts its own assessment based on current lending policies and the applicant’s circumstances. Changes to income, household expenses, interest rates, credit commitments or lender assessment methods can affect borrowing capacity. This means someone who qualified for their current home loan several years ago may receive a different assessment when applying to refinance today.

Can You Refinance to Access Equity With Less Than 20% Equity?

Refinancing an existing balance and refinancing while requesting additional borrowing are different scenarios. If you already have a relatively high LVR and want to access further equity, the additional borrowing would increase the loan balance and potentially increase the LVR further. This can affect lender requirements and may reduce the options available. Having equity in a property does not mean all of that equity is available to borrow. Any additional lending remains subject to the lender’s valuation, credit assessment and eligibility criteria.

Should You Wait Until You Have More Equity?

There is no universal answer because the appropriate timing depends on individual circumstances and the available lending options. Waiting could allow the loan balance to reduce through repayments, and property values may change over time. However, future property values, interest rates and lending policies cannot be predicted or guaranteed. Rather than assuming refinancing now or waiting is automatically better, borrowers can compare the potential costs and features of the available options.

Consider the Costs of Refinancing

A lower advertised interest rate does not necessarily mean refinancing will produce a lower overall cost. Depending on the loans and lenders involved, refinancing costs can include discharge fees, application fees, valuation costs, settlement charges and potentially LMI. Fixed-rate borrowers may also face break costs when leaving a loan before the fixed period expires. The loan term matters as well. Extending an existing debt over a longer repayment period may reduce individual repayments but could increase total interest paid, depending on the rates, fees and repayment structure.

Having less than 20% equity does not necessarily prevent you from refinancing a home loan. Some lenders may consider loans with an LVR above 80%, but additional costs or lending requirements may apply. The property’s lender-assessed value, outstanding loan balance, income, expenses, existing debts and overall application can all influence the outcome. When considering refinancing at a higher LVR, it is particularly important to look beyond the advertised interest rate. Potential LMI, refinancing fees, loan terms and the total cost of the proposed arrangement should also form part of the comparison.