What are Equity Release Loans and How Do They Work?

If you've been paying down your mortgage or your property's gone up in value, you've likely got equity sitting there doing nothing.

Equity is the gap between what your property's worth and what you owe on it. You can pull that cash out through refinancing without selling the place or taking on a separate high-interest loan. Builders use this all the time to fund the next project, buy another property, upgrade work vehicles, or consolidate debts into one lower-rate loan.

How Equity Release Works When You Refinance

You borrow against the value in your property by increasing your loan amount, then take the difference as cash. Most lenders will let you borrow up to 80% of your property's current value without paying lenders mortgage insurance. If your place is worth more now than when you bought it, or you've paid down a chunk of the loan, that 80% threshold gives you room to pull funds out.

Consider a builder who bought a property a few years back and has been making regular repayments while the local market climbed. The property was purchased with a loan that's now sitting at around 60% of the current value. Refinancing to 80% releases the difference in cash, which goes straight into a deposit for an investment property. The refinance process takes a few weeks, the lender orders a valuation to confirm the current value, and the funds get paid out at settlement.

Why Builders Refinance to Access Equity

You might need capital for a deposit on another property, want to buy work vehicles outright instead of financing them separately, or need to fund a renovation that'll add value. Some builders pull equity to invest in their business, whether that's tools, materials for a big contract, or hiring extra hands for a project pipeline.

Another common reason is debt consolidation. If you're carrying personal loans, car finance, or credit card debt at higher rates, rolling those into your mortgage can drop your overall interest cost and simplify your repayments. One loan, one rate, one direct debit.

The 80% Rule and Why It Matters

Most lenders cap refinance lending at 80% of your property's value if you want to avoid paying lenders mortgage insurance. Go over that and you'll wear the LMI cost, which can be several thousand dollars depending on how much you borrow. Some lenders will go higher if the deal makes sense or if you qualify for an LMI waiver, but 80% is the standard ceiling for a clean equity release.

If your property's worth $800,000 and you owe $400,000, you can borrow up to $640,000 without LMI. That leaves you $240,000 in accessible equity, minus any costs. Not all of that might be usable depending on your income and expenses, but that's the upper limit the lender will consider.

What Lenders Look at During a Refinance Application

Your income, existing debts, and credit history all get assessed the same way they did when you first borrowed. Lenders want to see you can service the new loan amount comfortably. For builders running their own business, that usually means providing recent tax returns, BAS statements, and bank statements showing consistent income. If you're on payroll with a building company, payslips and a letter from your employer will do the job.

The lender also orders a valuation to confirm what your property's worth right now. If the market's softened since you bought, you might have less equity available than you thought. If it's climbed, you're in a stronger position to pull funds out. The valuation typically costs a few hundred dollars and gets added to your loan or paid upfront depending on the lender.

Using Equity to Buy an Investment Property

Pulling equity from your home to fund a deposit on an investment property is one of the most common reasons builders refinance. You keep your current place, use the released cash as a deposit elsewhere, and let the rent from the new property cover most or all of the loan repayments. The interest on the portion of your loan used to buy the investment is usually tax-deductible, which makes the strategy more appealing from a cashflow perspective.

In a scenario like this, a builder might release $100,000 in equity, use $80,000 as a deposit on a unit, and keep $20,000 aside for stamp duty and settlement costs. The investment loan sits separately, the rental income offsets the repayments, and the original home loan increases but remains manageable. Done right, you're expanding your property portfolio without needing to save another deposit from scratch.

Fixed Rate Period Ending and Equity Release at the Same Time

If your fixed rate's about to expire, refinancing to access equity at the same time makes sense. You're already going through the process of moving lenders or switching loan types, so pulling cash out in the same transaction saves you doing it twice. Coming off a fixed rate also means you're not wearing break costs, which can be hefty if you try to refinance mid-term.

When your fixed rate period ends, your loan typically reverts to a variable rate that's often higher than what you could get by refinancing. That's a natural point to reassess your loan, check what equity you've got available, and decide whether pulling funds out makes sense for your next move.

What You Can and Can't Use Equity For

Lenders don't usually care what you spend the money on as long as it's legal and you can service the loan. Investment properties, renovations, cars, business expenses, and debt consolidation are all standard. Some lenders get twitchy if you're using it for gambling, overseas property, or other high-risk activities, but those situations are rare.

If you're using the funds for an investment purpose like buying another property or funding business expenses, the interest on that portion of the loan is often tax-deductible. Keep the funds separate in an offset or dedicated account so your accountant can track what's deductible and what's not. Mixing it all together makes tax time a headache.

How Long the Refinance Takes

From application to settlement, expect three to six weeks depending on how quickly you get paperwork in and how long the valuation takes. If you're self-employed, the lender might want more documentation, which can add a week or two. Once they've got everything, the valuation gets ordered, the loan gets approved, and settlement gets booked in with your conveyancer.

You don't need to do much during this time apart from respond to any requests for extra documents and organise your discharge from the old lender if you're switching. The new lender pays out the old loan, the difference gets deposited into your account, and your new repayments start from there.

When Refinancing to Access Equity Doesn't Make Sense

If you're already stretched on repayments or your income's dropped, borrowing more might put you under pressure. Lenders assess whether you can afford the new loan amount, and if the numbers don't stack up, they'll decline the application or offer you less than you asked for.

Another situation where it doesn't make sense is if you're planning to sell the property in the next year or two. Refinancing comes with costs like valuation fees, application fees, and sometimes discharge fees from your current lender. If you're selling soon, those costs might outweigh the benefit of accessing the equity now.

Call one of our team or book an appointment at a time that works for you. We'll run the numbers, check what equity you've got available, and work out whether refinancing makes sense for what you're trying to do.

Frequently Asked Questions