How to Leverage Equity to Secure Better Home Loan Rates

Home equity is one of the most powerful financial tools available to Australian homeowners. When used strategically, it can help you secure lower interest rates, negotiate better loan terms, and even unlock opportunities for renovations or investments. Whether you’re a first-time homeowner or an experienced investor, understanding how to leverage your equity can significantly improve your financial position.

This guide explains how equity works, its role in securing better home loan rates, and the practical steps you can take to maximise its benefits.

What Is Home Equity?

Home equity is the portion of your property that you truly own — calculated as the difference between your property’s current market value and the balance remaining on your home loan.

Example of equity calculation:

• Property market value: $800,000
• Outstanding mortgage balance: $500,000
• Home equity: $300,000

Equity generally increases over time as you pay down your mortgage or if the market value of your home rises. This financial resource can be used to negotiate better loan rates, fund major expenses, or invest in additional properties.

How Does Equity Help Secure Better Home Loan Rates?

Lenders typically view borrowers with high levels of equity as lower risk. By leveraging your equity, you can:

• Reduce your loan-to-value ratio (LVR): A lower LVR (under 80%) makes you eligible for discounted interest rates and removes the need for Lenders Mortgage Insurance (LMI).
• Access refinancing options: Significant equity can help you switch to a more competitive lender or negotiate better terms with your current lender.
• Improve loan features: High-equity borrowers are often eligible for premium loan products, including offset accounts and flexible repayment options.
• Fund property investments: Equity can serve as a deposit for investment properties, expanding your portfolio while maintaining a competitive interest rate.

Steps to Leverage Equity for Better Rates

1. Calculate Your Available Equity

Start by determining how much equity you have:

• Get a professional property valuation or ask your lender for an updated estimate.
• Subtract your current mortgage balance from the property’s market value.

For example, if your property is valued at $800,000 and your mortgage is $500,000, your equity is $300,000.

2. Assess Your Loan-to-Value Ratio (LVR)

LVR is calculated as:

In the example above:

• Loan amount: $500,000
• Property value: $800,000
• LVR: 62.5%

An LVR below 80% is typically required to access lower interest rates and avoid paying LMI. If your LVR is above 80%, you may need to build more equity through extra repayments or property improvements before refinancing.

3. Explore Refinancing Opportunities

If your equity has grown, refinancing can be a powerful tool to lower your mortgage rate. Compare offers across lenders, focusing on:

• Advertised rates and comparison rates
• Loan features like offset accounts, redraw facilities, and flexible repayments
• Fees, including discharge and application costs

Refinancing with a lower LVR can often unlock significantly better loan terms.

4. Negotiate With Your Current Lender

Armed with a strong equity position, you’re in a great place to negotiate with your lender. Ask your lender to review your rate and use competitor offers as leverage. Highlight your reduced LVR and positive repayment history to strengthen your case.

5. Consider a Home Loan Top-Up

A home loan top-up allows you to borrow against your equity for major expenses such as renovations, debt consolidation, or investment. This can sometimes improve your overall rate if the top-up reduces your LVR.

6. Use Equity as a Deposit for Investment

If you’re expanding into property investment, you can use your home equity as a deposit for a new purchase. Keeping your LVR low across your portfolio increases your chances of securing competitive rates on both your current and future loans.

Benefits of Leveraging Equity

• Lower interest rates: Reducing your LVR positions you as a low-risk borrower, making you eligible for better rates.
• Avoiding LMI: An LVR under 80% helps you avoid paying LMI, which can save you thousands of dollars upfront.
• Increased borrowing power: Equity can unlock additional funds for renovations, investments, or other major projects.
• Access to better loan features: Lenders are more willing to offer premium features to borrowers with a strong equity profile.

Challenges and Risks to Consider

While leveraging equity offers significant benefits, there are important risks to keep in mind:

• Over-borrowing: Accessing too much equity can leave you over-leveraged, increasing your financial vulnerability if property values fall or interest rates rise.
• Market volatility: Property values can fluctuate, which may reduce your equity buffer and impact your LVR.
• Increased debt: Borrowing against your equity raises your overall debt level, so it’s critical to have a solid repayment plan.
• Refinancing costs: Switching lenders often incurs costs such as application fees, valuation charges, and discharge fees. Weigh these against your expected savings.

Real-World Example: How Equity Can Save You Money

Scenario:
Sophia owns a home in Sydney worth $1,000,000. Her outstanding mortgage balance is $600,000, giving her $400,000 in equity.

Goal:
Sophia wants to leverage her equity to reduce her mortgage rate and finance $50,000 in home renovations.

Solution:

• She refinances her loan, lowering her LVR to 65%.
• Her new lender offers her a discounted variable rate of 4.5%, down from her previous 5%.
• She accesses $50,000 from her equity for renovations while maintaining a healthy LVR.

Outcome:

• Sophia’s monthly repayments decrease due to the lower interest rate.
• Her renovations increase the home’s market value, boosting her equity even further.

Tips for Leveraging Equity Effectively

• Maintain a safe LVR: Keep your LVR below 80% — or ideally 60% — to maximise access to premium rates and minimise risk.
• Choose your lender carefully: Not all lenders treat equity the same way. Compare options or work with a broker to find the best match.
• Use equity strategically: Focus on value-building activities like home improvements or investments rather than discretionary spending.
• Monitor market trends: Stay informed about local property values and interest rate movements to time your refinancing effectively.
• Seek professional advice: Consult with a mortgage broker or financial advisor to develop a plan that aligns with your goals and risk tolerance.

Government Incentives for Australian Homeowners

There are several government initiatives in Australia that can complement your equity strategy:

• First Home Buyer Assistance Schemes: Grants and stamp duty concessions help buyers build equity sooner.
• Home Guarantee Scheme: Allows eligible buyers to purchase with smaller deposits, accelerating equity growth.
• Energy efficiency rebates: Using equity for eco-friendly upgrades may qualify you for government rebates, improving your home’s value and lowering costs.

Final Takeaway

Leveraging home equity is a powerful way to secure better home loan rates, reduce costs, and expand your financial options. Whether you want to refinance, renovate, or invest in additional properties, understanding how to use your equity effectively can unlock significant long-term advantages.

To make the most of this strategy:

• Maintain a healthy LVR
• Research lenders and loan products carefully
• Use equity for meaningful, value-adding purposes
• Work with professionals to tailor your approach to your circumstances

By following these steps, you can take control of your mortgage, reduce financial stress, and accelerate progress toward your financial goals.