Do you need a deposit to refinance?

Find out if you need a deposit to refinance your home loan, how your equity plays a role and what happens if you have equity below 20%.

Refinancing your home loan can be a great way to save money on your monthly repayments, release equity or consolidate debt. But sometimes, the refinancing process can be a bit confusing.

One question that often arises is 'do you need a deposit to refinance?’

In this article, we answer frequently asked questions about deposits and refinancing, how equity plays a role in your refinance and what to do if your equity falls below 20%.

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Do you need a deposit to refinance your home loan?

No, you won’t need a traditional cash deposit to refinance your home loan like you did when you first bought your property.

Instead, your equity acts like a deposit and plays a critical role in determining your eligibility to refinance.

What is equity?

Equity is the difference between the current market value of your property and your outstanding home loan balance.

In other words, it's the portion of your home that you actually own and have built up over time through making repayments on your loan.

You can calculate your equity using this simple equation:

Equity = Property’s current market value – Outstanding home loan balance

For example, if your property is currently valued at $865,000 and you owe $400,000 on your home loan, your equity would be $465,000.

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How do you build your equity?

Equity can be built in two ways: Equity is built in two key ways:

1. By making payments on your loan and minimising how much you owe

2. If your property grows in value over time.

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How can equity help you refinance?

As you build equity, it provides security on your new loan and reduces the lender's financial risk.

If you have at least 20% equity in your home, you should be able to refinance without the need of a guarantor.

Much like how a normal home loan requires you to have at least a 5% deposit, refinancing loans will require you to have at least 5% equity in your home.

The more equity you have, the less of a risk you appear to a lender – which can help you secure that refinance.

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Can you refinance with less than 20% equity?

If you have less than 20% equity, there is still a chance you’ll be able to refinance.

However, in this case you’ll really need to pay careful attention to the costs and savings of refinancing as you might need to pay Lenders Mortgage Insurance (LMI) – even if you’ve paid it before.

LMI fees are charged to protect the lender if you default on your loan.

If you’ve worked out that refinancing will save you money, be sure to factor in any LMI costs you may have e pay on top.

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Should you refinance your home loan?

It’s important to remember that there are other factors to consider when you refinance outside of securing a lower interest rate.

Think about how you might want to change your loan type, structure and home loan features.

There are other ways to save than getting a lower rate. For example, if you’re paying for an offset account that’s not being put to use, you can close that account and save the fees associated with keeping it open.

If you’re looking for a way to more easily manage several different debts, like student debt or credit cards, refinancing might allow you to consolidate your debt and reduce your interest rate on those unsecured loans.

Whatever you’re looking to achieve, talk to your local FND Broker for free support with your home loan refinance.