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.
Frequently Asked Questions
How do declining property prices affect refinancing?
Declining property prices can affect your home’s equity, which is crucial for refinancing. Lower equity may reduce your chances of successfully refinancing your mortgage.
What is equity and why is it important for refinancing?
Equity is the difference between your property’s market value and your mortgage balance. Lenders typically require you to have at least 20% equity in your home to refinance.
Can I still refinance if I don’t have 20% equity?
Yes, but you may have to pay lenders mortgage insurance, which could offset the benefits of refinancing.
What is cashing out equity?
Cashing out equity involves refinancing your existing mortgage into a larger loan and taking the difference in cash, which can be used for purposes like renovation or investment.
How does a drop in property prices affect my ability to cash out equity?
A drop in property prices can reduce the amount of equity you can cash out. For example, if your home’s value decreases by 10%, you may be able to unlock less equity than before.
What is negative equity and how does it affect refinancing?
Negative equity occurs when your home’s value drops below your mortgage balance. In such cases, refinancing is usually not an option.
How can Zippy Financial help me with refinancing in a declining property market?
Zippy Financial offers expert advice on navigating the complexities of refinancing, especially when property values are declining. They can help you assess your options and find the most suitable financial solutions.
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!
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.