Refinancing to access equity: what a lender needs to see for each purpose

Refinancing to access equity: what a lender needs to see for each purpose

Brisbane property values have moved a long way in the past few years. For many owners in the inner north, that means a meaningful amount of usable equity sitting in their home.

Accessing it is usually possible. Doing it well depends on one thing most people do not think about until the lender asks: what the money is for.

A scenario from Windsor

A couple in Windsor owned their home with a loan sitting around 50% of its current value. They had two plans. They wanted to renovate the kitchen and bathroom, and they wanted a deposit ready for their first investment property within the next year.

Their first instinct was to ask their bank for one larger loan and keep the spare money in their everyday account.

Why purpose matters

Lenders assess an equity release differently depending on what the funds will be used for:

• Renovations are straightforward for most lenders. Some will ask for quotes or a builder's contract for larger amounts.
• An investment deposit is generally acceptable, but the lender will want to understand the plan and may assess the future purchase at the same time.
• General purposes or "future use" without a clear plan are where lenders become more cautious, and some cap the amount they will release.
• Business use is a separate category and is not available from residential lending policies in the same way.

The purpose also affects the tax position. Interest on borrowing used to buy an investment property may be deductible. Interest on money used for the family home generally is not. Mixing the two in one loan makes that very hard to untangle later.

What we did

We compared lenders on how they handle multi-purpose equity releases, how much they would release without detailed quotes, and whether they would let us structure separate loan splits from the start.

The structure we recommended had three parts:

1. The existing home loan, refinanced as is.
2. A separate split for the renovation funds, drawn as needed.
3. A separate split for the investment deposit, kept untouched until the purchase.

Each split had its own offset or redraw arrangement, so the money for each purpose stayed separate and the interest on the investment split was clean from day one.

The outcome

The couple refinanced to a lender with a sharper rate than their existing bank and released enough equity for both goals. Their combined LVR stayed under 80%, so there was no lenders mortgage insurance.

When they bought their investment property later, the deposit split was already in place. Their accountant had a clear record of which borrowing related to which purpose.

Before you release equity

• Know your numbers. Equity is your property's value less your loan, but most lenders will only lend up to 80% of value without LMI. Usable equity is usually smaller than people expect.
• Get a valuation view first. We can usually order an indicative valuation before you apply, so you are not relying on online estimates.
• Split by purpose. Separate loan accounts for separate purposes. Talk to your accountant about the tax treatment before the money moves.
• Do not draw what you do not need yet. Interest is charged on what you borrow. Holding funds in an offset reduces that, but only if they stay there.
• Check serviceability. Releasing equity is a new loan. The lender will assess your income and expenses as if you were applying from scratch.

Thinking about using your equity?

Start with our Loan Health Check to see where your current loan sits, or book a time to talk through the structure. We are a few minutes from Windsor, in Grange.

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