In this blog you will learn how to save thousands by reducing your interest rate using the equity in your home.
First, let’s take a look at what home equity means.
Owning a home is one of the most significant financial investments many Australians will make in their lifetime. One key aspect of homeownership that often goes unnoticed is equity.
Equity is the difference between the value of your property and the remaining balance on your mortgage.
If you’ve owned your home for a few years, particularly over the last few years, chances are your home equity has increased due to rising property values in Australia. This can significantly reduce the cost of your mortgage. But you need to take action!
The Surge in (most) Australian Property Prices
In recent years, Australia has witnessed a substantial increase in property values, significantly impacting homeowners. The demand for housing, a growing population, low interest rates (comparative to long term trends), and government incentives have all contributed to property price increases.
Below is a snapshot of property price increases in major Australian cities over the past two years:
| Mean dwelling price, states and territories | |||
| Dec 22 ($’000) | Dec 24 ($’000) | Increase | |
| NSW | 1,130.5 | 1,214.1 | 7% |
| VIC | 894.4 | 874.2 | -2% |
| QLD | 738.8 | 923.6 | 25% |
| SA | 644.3 | 834.7 | 30% |
| WA | 630.3 | 850.1 | 35% |
| TAS | 649.6 | 645.2 | -1% |
| NT | 488.2 | 500.9 | 3% |
| ACT | 929.2 | 956.8 | 3% |
| Australia | 881.2 | 976.8 | 11% |
This consistent growth in property prices means many Australian homeowners now have more equity in their homes than they might have realised.
What Does Increased Equity Mean for You?
Home equity is a powerful financial tool. When the value of your property increases, the portion of the home you truly own (equity) also rises.
For example, if you purchased a home in Perth for $500,000 in 2022 with a $450,000 mortgage (leaving you with 10% equity, 90% LVR), and the home is now worth $675,000, your equity has jumped from $50,000 to $225,000 without you making extra repayments.
In this example your equity has increased from 10% to 33%.
Conversely your Loan to value ratio (LVR) has reduced (improved) from 90% to 67%.
The way to look at this simply is that the percent you own is equity and the percent the bank owns is the LVR. Sort of makes sense!
Why does this matter?
Because banks consider the loan-to-value ratio (LVR) when determining the interest rate on your mortgage. A lower LVR (meaning you have more equity) is seen as less risky to banks and financial institutions. The general rule is:
- Higher LVR (e.g., 90%) = Higher Interest Rate
- Lower LVR (e.g., 70%) = Lower Interest Rate
If your equity has increased due to property values increasing, you could be eligible for a lower interest rate simply by refinancing or renegotiating your mortgage.
Reviewing Your Mortgage: The Key to Mortgage Savings
Let’s assume your equity has increased. By talking to your bank or refinancing through a different bank, your property value will be reassessed.
When the bank reviews the value of your house your LVR has reduced and the bank can reprice your interest rate lower.
Many borrowers are unaware that they could be paying more interest than necessary simply because their mortgage was set when their equity was lower. By reassessing your mortgage, you might discover opportunities to:
- Lower Your Interest Rate: If your equity has grown, you may qualify for a better rate, saving you thousands over the life of your loan.
- Eliminate Lenders Mortgage Insurance (LMI): If you originally purchased your home with a small deposit and paid LMI, increased equity could mean you no longer need to pay this insurance.
- Access Home Equity: If you’re interested in renovations, or other financial goals, you may be able to access some of your equity during the refinancing process and still reduce your interest rate.
How to Check If You Qualify for a Better Interest Rate
You have two choices here. You can pass this on to a mortgage broker to assist, or do it yourself. To do it yourself, take the following steps:
- Assess Your Home’s Current Value: Use online property valuation tools, speak with a real estate agent, or get a formal valuation from your lender.
- Calculate Your New LVR: Divide your outstanding mortgage balance by your home’s current value and multiply by 100 to get your percentage. If it has dropped below 80%, you are in a strong position to negotiate better terms.
- Compare Loan Offers: Contact your current lender to see if they can offer a better deal, or shop around for lower rates with other lenders.
- Consider Refinancing: If another lender offers better terms, refinancing could help you secure lower repayments and long-term savings.
Take Action to Maximise Your Savings
If property values have worked in your favour, taking action to optimise your mortgage can lead to substantial financial benefits. Whether it’s securing a lower interest rate, unlocking home equity, or eliminating unnecessary fees, reviewing your loan in light of rising property prices is a smart financial move.
At One Click Life, we help Australians navigate their financial life with ease. If you’re wondering how to make the most of your home equity, talk to one of our mortgage brokers today. The sooner you take action, the sooner you will start saving money!