Picture this: you've been faithfully paying down your mortgage, building up equity as you go. Now, you're dreaming of a renovation, debt consolidation, or another big expense, but you'd rather not juggle multiple loans to make it happen.
That's where cash-out refinancing steps in.
But what is cash-out refinancing?
In simple terms, cash-out refinancing replaces your existing home loan with a larger one, and you receive the difference in cash. It's sometimes called a "home equity release" because you're borrowing against the value you've built up in your property.
Before diving in, knowing how cash-out refinancing works in Australia and what it involves is crucial. In this guide, we'll cover the essentials, including:
How cash-out refinancing works in Australia
What you can use cash-out refinancing for
Its benefits and potential risks
The fees connected with cash-out refinancing
How it differs from a home equity loan
How cash-out refinancing affects your credit score
Whether you can still apply with a low credit rating
By the end, you'll have a clearer sense of whether cash-out refinancing could be your next smart money move and how an Aussie Broker can help you make it happen.
How does cash-out refinancing work in Australia?
With cash-out refinancing, you pay off your old mortgage and switch to a new one that's big enough to cover what you owe and the extra funds you'd like. It's sometimes called a "home equity release" because you're essentially dipping into the value you've built up in your home.
Here's how the process typically goes:
Calculate your home equity.
Start by figuring out how much equity you've built. A lender will usually do a property valuation and look at your loan-to-value ratio (LVR). Many prefer LVRs at 80% or lower; it's often less risky and may help avoid extra fees.
Assess how much you can borrow.
Depending on your income, credit history, your lender's policies, and other factors, you might access up to 80% of your property's value. Remember, your monthly repayments and overall loan term can grow the more you borrow.
Apply and provide documents.
Lenders usually want documents like payslips or bank statements to see if you can handle a bigger loan. They'll also do a credit check.
Loan approval and settlement.
Once they receive your application, the lender reviews the details to finalise your loan. Approval can take a few days to a few weeks. A local Aussie broker can help speed up the process by ensuring you have all documents ready.
Fund release and repayments.
After approval, your new mortgage pays off the old one. You'll then start repayments on the new, higher-balance loan, with the extra funds ready for your plans.
A typical refinance can take two to four weeks from application to settlement, though it can run longer if more checks or documents are needed. Your local Aussie Broker can keep things on track and much less stressful.
What can I use cash-out refinancing for?
Cash-out refinancing is handy for all sorts of goals. You might:
Renovate or extend: Give your home a new look (and potentially boost its value).
Consolidate debt: Roll multiple high-interest debts into one home loan repayment.
Invest in another property: Grow your portfolio using your built equity.
Cover major expenses: Fund big life moments like education costs.
Remember, some lenders limit the amount you can withdraw and what you can use the money for.
What are the benefits and risks of cash-out refinancing?
Here’s a quick overview of its benefits and potential dangers:
Benefits of cash-out refinancing | Potential risks of cash-out refinancing |
|---|---|
Rolling high-interest debts into your mortgage could lower your overall interest rate and reduce your repayments to a single payment. | Borrowing more means bigger repayments or a longer loan term; both impact your budget. |
Smart renovations might increase your home’s value in the long run. | A rate rise means higher repayments if you’re on a variable loan. A fixed loan offers stability but can be less flexible. |
Use equity to invest in or help your kids with school fees or other milestones. | If property values drop, you could owe more than your home is worth, making it harder to refinance or sell. |
Refinancing is a chance to look for offset accounts or repayment features that suit your goals. | Application, exit, and ongoing fees can mount up. It’s worth checking if the cost is worth the switch. |
Cash-out refinancing can be a real win if you do your homework. If you’re unsure about fees, interest rates, or how much you should borrow, chat with an Aussie Broker for guidance tailored to your situation.
What fees are involved?
Refinancing costs can vary from lender to lender. While some might waive certain fees, be aware of:
Discharge fees: Paid to your old lender when you close your existing loan.
Application fees: Setup or establishment fees for the new loan, which might include a property valuation fee.
Lenders Mortgage Insurance (LMI): LMI can be pricey if you borrow over 80% of your home's value.
Property valuation fees: Lenders will want a fresh property valuation to confirm how much equity you have.
How is it different from a home equity loan?
A home equity loan is an additional loan on top of your existing mortgage, while a cash-out refinance replaces the old mortgage with a larger one. Here's a quick comparison:
Cash-out refinancing | Home equity loan | |
|---|---|---|
Loan structure | One new mortgage replaces your current one. | A separate loan alongside your original mortgage. |
Interest rates | Often similar to standard mortgage rates because it’s your primary loan. | Can be higher than typical home loan rates, as it’s often seen as a second mortgage. |
Loan terms | You start fresh with a new loan term. | Has its own term and repayment schedule. |
Fund access | You receive the difference in cash at settlement. | Typically a lump sum or line of credit separate from your main mortgage. |
Best for | Streamlining into one loan or taking advantage of new mortgage features. | If you’re happy with your current mortgage but just want extra funds. |
You might also be interested in: Refinancing your home loan to access equity
How much equity do you need?
Most Aussie lenders want you to hold on to at least 20% equity post-refinance. In other words, you can usually borrow up to 80% of your home's value.
For example, if your home is worth $800,000, 80% of that is $640,000. If you still owe $400,000, you could refinance up to $640,000, leaving you $240,000 in available equity.
You'll need a stable income, a decent credit score, and other basics. Low-doc or non-bank lenders might be options if you're missing some documents but watch out for higher rates and fees.
Will cash-out refinancing affect your credit score?
Applying for a new loan generally appears as a hard inquiry on your credit file, which can give your credit score a short-term dip. In the bigger picture, using the refinance to consolidate debt and keep up with repayments could boost your credit over time. Helpful tips include:
Limiting how many loan applications you make in a short span.
Paying all current debts on time.
Keeping older credit accounts open to show a longer history.
Monitoring your credit for any errors.
Can you get cash-out refinancing with bad credit?
It can be tougher, but not impossible. A lower score might mean higher interest rates or fewer loan choices. You can boost your chances by:
Paying down high-interest debts first.
Showing stable, ongoing income.
Maintaining good credit habits (no missed or late payments).
Building a savings buffer.
Even if traditional banks say "no," you may still have options through non-bank lenders or specialist products. An Aussie Broker can walk you through those choices so you can decide if it makes sense for you.
Is cash-out refinancing right for you?
Whether you want to renovate, consolidate debts, or invest, cash-out refinancing can unlock your home's hidden potential. But it's not the perfect match for everyone. If your budget is already stretched, adding more debt could be risky.
At Aussie, we're here to help you make the right call. We can compare 25+ lenders, get you pre-approved, and keep things as simple as possible. Cash-out refinancing should lift you, not weigh you down.
So, if you're unsure, let's chat about whether it's the right move for your goals.