Smart Ways to Approach Refinancing for Education Costs

Releasing equity from your home to fund study can work, but only if the new borrowing is structured to be repaid well before the loan ends.

A longer degree, a career change or a child's tuition can all justify using the value you have built in your property. The lender sees it as new debt, though, and the way you set it up matters as well as the interest rate. For homeowners in Stafford and nearby Brisbane suburbs, a few decisions made before the application can keep the cost under control.

How Does a Refinance to Access Equity for Education Work?

A refinance replaces your current loan with a larger one, and the extra amount is paid to you as cash for tuition, materials or living costs. Because the total debt increases, lenders treat it as new lending and not as a like-for-like switch.

Under the National Consumer Credit Protection Act, a lender or broker must ask about your requirements, objectives and financial situation, and take reasonable steps to verify them. Banks must also assess your ability to repay at an interest rate at least 3 percentage points above the loan rate. If you are a Stafford homeowner who took out your loan several years ago, your income, expenses and other debts are all assessed again, so your current position matters as much as your equity.

Your broker must also act in your interests and recommend a refinance only if the overall result suits you after costs are counted. That includes any broker fees.

How Much Equity Can You Actually Use?

Your usable equity is the property's valuation multiplied by the lender's maximum loan-to-value ratio (for example 80 per cent), minus your current loan balance. The amount is subject to lender approval and serviceability. If you borrow more than 80 per cent of the value, you may have to pay lenders mortgage insurance, which raises the cost.

That makes the property valuation the starting point. A lender's valuation can differ from an online estimate, so it is worth confirming the figure before you plan around it. Your borrowing capacity will also limit the loan amount, and it can be lower than your equity suggests if you have other debts or reduced income during study.

A home loan health check is a practical first step. It shows your current rate, features and balance next to what lenders may offer, so you can decide whether a refinance is worthwhile before any application starts.

Refinance to Fund Study: A Worked Example at 6.75%

Borrowing $40,000 against your home adds about $276 a month if repaid over 25 years, but about $787 a month if repaid over 5 years. Both figures are illustrative and use a rate of 6.75% p.a. on principal and interest repayments.

Consider a homeowner with a postgraduate course that costs $40,000 over two years. They have enough equity to refinance and release that amount, with about 25 years left on the loan. Added straight to the existing loan, the extra repayment looks manageable at around $276 a month. The catch is that they would still be paying for the course long after they graduate.

In a scenario like this, a broker can set up the $40,000 as a separate loan split. The homeowner keeps the main loan unchanged and aims to clear the study split over five years. At 6.75% p.a., that needs roughly $787 a month, so they check that figure against their budget using the mortgage repayment calculator before committing. If $787 is too high, they can choose a longer period for the split, such as 10 years, and accept a lower repayment with more interest paid overall.

The outcome is a deliberate repayment plan for the study debt instead of a balance that disappears into a 25-year loan. The trade-off is a higher monthly commitment while the split is being repaid, and that is the figure to test before you apply.

What Costs Apply When You Refinance Home Loan Funds Out?

The main costs are a break fee if you are on a fixed rate, a discharge fee on your current loan, an application fee on the new one, and lenders mortgage insurance if you borrow above 80 per cent of the value. If you stay with your current lender, a switching fee can apply.

Exit fees on termination are prohibited for residential loans entered into on or after 1 July 2011, but break fees and discharge fees are not covered by that ban. A break fee applies only to fixed rate loans ended early, so timing matters. If your fixed term is close to finishing, check your options on the fixed rate expiry page, because waiting can avoid the fee entirely.

If the costs of moving are higher than the benefit, it may be more sensible to ask your current lender about a top-up instead. Your broker should compare both routes in dollar terms.

Is the Interest on Education Borrowing Tax Deductible?

Not automatically. The ATO states that interest on money borrowed for private purposes cannot be claimed, and what counts is how the borrowed money is used, not what property secures the loan.

Whether study costs are private depends on your circumstances, so speak with your accountant before assuming any deduction. If your home loan is mixed with an investment loan, the ATO requires interest to be apportioned when part of a refinance is used for private purposes. That ratio generally applies for the life of the loan, so keeping the study funds in a separate split makes your records much clearer.

Is Releasing Equity the Right Way to Pay for Study?

It suits borrowers who want a lower repayment spread over a long term, but it is not always the right choice. Equity release usually involves larger amounts and a longer commitment than something like a personal loan, which may suit smaller costs with a fixed end date.

The risk with equity is that you secure study costs against your home and may pay interest for far longer than the course lasts. ASIC also notes that if repayments fall only because the term is longer, you will pay more interest over that term. Weigh that against any career benefits, and be realistic about your income while you study.

Your Stafford mortgage broker can compare lenders, split structures and repayment periods side by side. Call one of our team or book an appointment at a time that works for you, and we will work out whether releasing equity suits your study plans.

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