Refinancing to access equity gives you the capital to buy your next investment property without needing to save a separate deposit.
Prahran property owners with established homes often hold substantial equity that can fund an investment purchase. The typical scenario involves refinancing your current mortgage to release this equity while potentially securing more favourable loan terms. The process requires a property valuation, an assessment of your borrowing capacity, and careful consideration of how the new loan amount affects your repayment obligations.
How Equity Release Works When Refinancing
Equity is the difference between your property's current value and what you owe on the mortgage. Most lenders allow you to borrow against up to 80% of your property's value without incurring Lenders Mortgage Insurance, though some will go higher with additional costs. When you refinance to release equity, the lender provides a new loan that covers your existing mortgage balance plus the additional funds you need for the investment deposit and associated purchase costs.
Consider a scenario where your Prahran home is valued at the current median and you owe $400,000. At 80% loan-to-value ratio, you could access around $200,000 in usable equity after accounting for costs. This amount covers a deposit on an investment property and leaves room for stamp duty and other settlement expenses. The new loan amount becomes $600,000, replacing your original $400,000 mortgage.
Property Valuations in Prahran's Mixed Market
Lenders require a current valuation before approving equity release. Prahran's property market includes Victorian-era terraces, Art Deco apartments, and contemporary townhouses, each with different valuation considerations. A lender's valuer assesses recent comparable sales, property condition, and location factors such as proximity to Chapel Street or Greville Street precincts.
Valuations can differ from recent sales or online estimates. In our experience, properties near commercial zones or on main roads sometimes return lower valuations than owners expect, particularly if comparable sales involve quieter residential streets. If the valuation falls short, you have options including challenging the valuation with additional evidence, contributing more of your own funds, or selecting a different investment property at a lower price point.
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Structuring the Investment Loan
Most borrowers split their refinance into two separate loan accounts: one for the existing home loan and another for the investment portion. This structure keeps the investment debt separate, which matters for tax purposes since interest on investment borrowings is generally tax-deductible while interest on owner-occupied debt is not.
The equity release loan for the investment portion can be set to interest-only repayments, which reduces your monthly outgoings and improves cash flow during the initial years of property ownership. The owner-occupied portion typically remains on principal and interest repayments. Lenders assess your ability to service both loans together, factoring in rental income from the new investment property at a discounted rate, usually 80% of the expected rent.
Borrowing Capacity and Serviceability
Accessing equity only works if you can service the increased loan amount. Lenders calculate serviceability using your income, existing debts, living expenses, and the proposed new loan repayments. They also apply a buffer, assessing whether you could still afford repayments if interest rates increased by 2-3%.
For Prahran residents with strong income and minimal other debts, serviceability is rarely an issue. However, if you have car loans, personal debts, or high credit card limits, these reduce your borrowing capacity. In some cases, consolidating these debts into the refinance can improve serviceability by reducing your total monthly commitments, though this extends the repayment term for those debts.
When Refinancing for Equity Makes Sense
Refinancing to access equity suits property owners who have built substantial equity, can service the higher loan amount, and want to expand their property portfolio without waiting years to save another deposit. It works particularly well when your current loan is on unfavourable terms, such as a high variable rate or a fixed rate that has recently expired.
Timing matters. If you are coming off a fixed rate period, refinancing to access a lower rate while simultaneously releasing equity achieves two goals in one application. You avoid reverting to your lender's standard variable rate, which may be higher than rates available elsewhere, and you secure the funds needed for your investment purchase.
Costs Involved in the Refinance Process
Refinancing involves several costs that affect the overall financial benefit. Discharge fees from your current lender typically range from $300 to $500. Application and settlement fees for the new loan vary by lender, with some charging upfront fees and others offering no-cost refinances. Valuation fees are usually $200 to $400, though some lenders waive this cost as part of their refinance offer.
If you are refinancing out of a fixed rate period early, break costs can be substantial depending on how much time remains and how far rates have moved since you locked in. Our fixed rate expiry calculator can help estimate whether waiting until the fixed period ends makes more financial sense than refinancing immediately.
Choosing the Right Loan Features
The refinance process is an opportunity to secure loan features that suit your circumstances. An offset account linked to your owner-occupied loan reduces the interest you pay on that portion without affecting the tax-deductibility of your investment loan. Redraw facilities allow you to access extra repayments if needed, though offset accounts generally offer more flexibility.
Some lenders offer rate discounts for larger loan amounts or professional packages that include fee waivers and reduced rates. If you are expanding your property portfolio, a lender with strong investment lending policies and competitive rates for multiple properties becomes important.
Working with a Mortgage Broker in Prahran
A mortgage broker can access multiple lenders and compare their equity release policies, interest rates, and loan features. Different lenders have different appetites for investment lending, and some offer more favourable terms for specific property types or locations. A broker also manages the application process, coordinates valuations, and ensures the refinance settles in time for your investment property purchase.
For Prahran clients, working with a local broker who understands the area's property market and typical valuation outcomes adds value. They can identify which lenders are likely to provide the valuation you need and which offer the most suitable loan structure for your circumstances.
Refinancing to access equity is a practical way to fund your next investment property while potentially improving your current loan terms. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
How much equity can I access when refinancing for an investment property?
Most lenders allow you to borrow up to 80% of your property's current value without Lenders Mortgage Insurance. The usable equity is the difference between 80% of the property value and your remaining mortgage balance, minus refinancing costs.
Should I split my refinance into separate loans for owner-occupied and investment purposes?
Yes, splitting the loans keeps the investment debt separate, which is important for tax purposes. Interest on the investment portion is generally tax-deductible, while interest on your owner-occupied debt is not.
What happens if the property valuation comes in lower than expected?
If the valuation is lower than anticipated, you can challenge it with supporting evidence, contribute additional funds from savings, or adjust your investment property budget. Some borrowers also consider lenders who may provide a more favourable valuation.
Can I refinance to access equity if I am still in a fixed rate period?
Yes, but you may incur break costs if you exit a fixed rate early. These costs depend on how much time remains on the fixed term and current rate movements. It may be worth waiting until the fixed period ends unless the benefits outweigh the break costs.
How do lenders assess my ability to service a larger loan after releasing equity?
Lenders assess your income, existing debts, living expenses, and the proposed loan repayments. They also apply a buffer to ensure you can afford repayments if rates increase by 2-3%. Expected rental income from the investment property is included but usually discounted to 80%.
