How to Refinance When Property Prices Are Declining

You may have heard that property values are dropping, but what does this mean if you are planning on refinancing?

With the rising cost of living and climbing interest rates, you may be looking to refinance your mortgage. Depending on your circumstances, it may be a great time to get a better interest rate on your loan. Not to mention that if you need access to funds for an investment property or renovation, refinancing can allow you to cash out equity in your home to use for other purposes.

According to CoreLogic, 79.5% of house and unit market values are on the decline across Australia, and this can affect refinancing outcomes.

We will walk you through what the effects of a property value drop can mean for refinancers and how you can act now to get ahead of the curve.

The Effects of Property Prices Drop Can Mean for Refinancers

Refinancing and your property’s value

Rising rates have contributed to declining property values in some areas around the country.

For example, according to the latest CoreLogic data, Sydney’s property prices have declined 10% since they peaked in February 2022, and many economists believe they will fall even further.

As a homeowner, a drop in property value can affect your equity. That is because equity is the difference between your property’s (market) value and your mortgage balance. And it is a number that lenders pay attention to when assessing refinancing applications. 

Refinancing before your equity drops may see your refinancing application have a greater chance of success. Most lenders will typically require you to have 20% equity in your home to refinance, which essentially serves as a deposit.

According to this graph, if you have bought a house in Sydney (for example) since June 2011, due to recent property price declines, you soon may no longer have 20% equity in your home. 

If you don’t have 20% equity, you could still refinance by paying lenders mortgage insurance, but that would likely defeat the purpose of refinancing in the first place. And if you fall into negative equity, where your home’s value drops below your mortgage balance, then refinancing most likely won’t be on the cards at all and you will be stuck with the current lender. 

So, if you are interested in refinancing your loan to get a better rate, sooner may be better than later, depending on how your property value is fairing.

Refinancing to cash-out equity

If you are keen to unlock some equity – you are not alone!

According to NAB research, seven in 10 mortgage holders recently cashed out equity while property prices were high and used the money to renovate, invest in property or shares or boost their superannuation. 

How does cashing out equity work?

Let’s say you bought an $800,000 house five years ago that is now worth $1 million. And let’s say you took out a $600,000 loan for that house, which you have managed to pay down to $500,000. By refinancing that $500,000 loan into an $800.000 loan (banks will typically let you borrow up to 80% of a property’s market value), you can unlock $300,000 in equity. 

However, if you delay a year or so, and national property prices decline 10% over this period, your house might only be valued at $900,000. That would mean if you wanted to unlock 80% of your property’s market value, you could only refinance your $500,000 mortgage into a $720,000 loan and therefore only unlock $220,000 in equity. 

Get in touch

If you have been considering refinancing lately, contact us to find out more. Whether you are looking to get a better rate or unlock equity in your home, we can help you!

Phone: 1300 855 022

Email: clientservices@zippyfinancial.com.au