Common Mistakes When Accessing Equity Without Selling

Refinancing to access equity means borrowing against the value your property has gained without selling it.

You refinance your existing loan to a higher amount, and the difference between your old loan balance and your new loan is paid to you as cash. Most lenders will allow you to borrow up to 80% of your property's current value without paying lenders mortgage insurance, though some lenders offer 90% for professionals in certain circumstances. The amount you can access depends on your current equity position, your borrowing capacity, and the lender's serviceability calculations.

Consider a lawyer who purchased in 2019 with a loan of $600,000 against a property now valued at $950,000. They've paid the loan down to $540,000. At 80% loan-to-value ratio, they could borrow up to $760,000. After repaying the existing $540,000 loan, they would have access to $220,000 in cash. Whether they can actually borrow that amount depends on their income, existing debts, and the lender's assessment rate.

Why lawyers use equity release differently to salaried employees

Most people release equity to fund renovations or consolidate debt. Lawyers more commonly use it to fund an investment property deposit, contribute to a practice acquisition, or establish a debt recycling structure. The purpose affects how the loan is structured and which lender will approve it.

If you're releasing equity to buy an investment property, the interest on the released portion is generally tax-deductible once those funds are used for the investment deposit. That requires the funds to be kept separate from personal expenses, which means setting up the loan with a split or separate account from day one. In our experience, this separation is easier to maintain if the equity release is structured as a distinct split at the time of refinancing, rather than trying to trace funds later.

If you're releasing equity to invest in shares or a managed fund as part of a debt recycling strategy, the same principle applies. The borrowed funds need to remain traceable to the investment for the interest to remain deductible. Lenders also assess this type of borrowing differently, because the security is your home but the funds are being deployed into a non-property asset.

What lenders actually assess when you apply to release equity

Your borrowing capacity is recalculated from scratch when you refinance. The lender doesn't just add the equity amount to your existing loan and approve it. They assess your current income, your current liabilities, your living expenses, and they apply a serviceability buffer, usually around 3% above the actual interest rate you'll pay.

This recalculation catches people out, especially if their income structure has changed since they first borrowed. A senior associate who took out their original loan on a base salary of $120,000 may now be earning $180,000 including performance bonuses and overtime, but if those additional components aren't consistent or contractual, some lenders will exclude them. Others will include them if they've been received for two consecutive years and are reflected in tax returns.

If you've taken on additional debt since your original loan, such as a car loan or increased credit card limits, that reduces your borrowing capacity even if you don't carry a balance. Lenders assess credit cards at their full limit, not the amount you owe. A $30,000 credit card limit can reduce your borrowing capacity by $150,000 or more, depending on the lender's serviceability model.

How property valuation affects the amount you can access

The lender will order a valuation when you apply to refinance and release equity. If the valuation comes in lower than you expected, the amount you can access drops accordingly. A property you believe is worth $1.1 million that's valued at $1.05 million reduces your available equity by $40,000 at an 80% loan-to-value ratio.

Valuations are based on recent comparable sales in your area, the condition of your property, and the valuer's assessment on the day. If you've renovated or significantly improved the property, mention it in the application. Some lenders allow you to provide supporting information to the valuer, such as recent sales data or details of recent upgrades. Others don't. If the valuation comes in low and you believe it's incorrect, you can challenge it, but that delays the application and there's no guarantee the lender will accept a second valuation.

In some cases, especially where the loan amount is modest relative to the property value, lenders will use an automated valuation model instead of a physical inspection. These are faster but less nuanced. If your property has unique features or recent improvements that wouldn't show up in an automated model, you can request a full valuation.

The offset versus redraw decision when structuring equity release

When you release equity, you need to decide whether to structure the new loan with an offset account or rely on redraw. This matters more than it seems, because it affects your flexibility and your tax position if any portion of the loan is used for investment purposes.

An offset account sits alongside your loan and reduces the interest you're charged on the full loan balance. If you have a $760,000 loan and $50,000 in your offset account, you only pay interest on $710,000. The funds in the offset remain accessible, and you can withdraw them without affecting the loan balance or the deductibility of interest on any investment portion of the loan.

Redraw allows you to withdraw extra payments you've made above the minimum required. It's functionally similar to offset in some cases, but the key difference is that redraw is a feature of the loan itself, not a separate account. Some lenders restrict redraw availability, especially on fixed rate loans. More importantly, if you've made extra payments on a loan that includes both deductible and non-deductible debt, withdrawing from redraw can muddy the tax treatment. Offset keeps the funds separate and avoids that issue.

For lawyers using released equity for investment purposes, offset is usually the clearer structure.

When refinancing to access equity doesn't make sense

Refinancing to release equity isn't appropriate if your income can't service the higher loan amount, if you're planning to sell the property within the next 12 to 24 months, or if you're currently on a fixed rate with significant break costs.

Break costs apply when you exit a fixed rate loan before the fixed period ends. They're calculated based on the difference between your fixed rate and the lender's current cost of funds for the remaining fixed period. If you fixed at 2.5% and rates have since risen, the break cost is usually zero or minimal. If you fixed at 4.5% and rates have since fallen, the break cost can be tens of thousands of dollars. Some lenders will let you port your fixed rate to the new loan amount, but that's uncommon and usually only available if you stay with the same lender. If your fixed rate is coming to an end within six months, it's usually worth waiting rather than paying to exit early.

If you're planning to sell the property soon, refinancing to access equity adds unnecessary cost. Application fees, valuation fees, and discharge fees when you sell can add up to several thousand dollars. If you'll have access to the equity through the sale proceeds in the near term, wait.

How we structure equity release for lawyers acquiring a second property

When you're using released equity as a deposit for an investment property, the structure needs to keep the borrowed funds separate so the interest remains deductible. That means setting up a split loan at the time you refinance, with one split representing your original owner-occupied debt and the other representing the equity release for investment purposes.

Consider a scenario where you owe $540,000 on your home and you want to release $150,000 to use as a deposit on an investment property. The loan is structured as two splits: $540,000 for the owner-occupied portion and $150,000 for the investment portion. The interest on the $540,000 split is not deductible. The interest on the $150,000 split becomes deductible once the funds are used to purchase the investment property. You'll need to transfer the $150,000 into a separate account and ensure it's only used for the investment deposit and associated costs.

This separation is not optional if you want to claim the deduction. The ATO requires clear traceability between borrowed funds and the income-producing asset. Mixing the funds or using them for other purposes, even temporarily, can compromise the deduction.

Some lenders will allow you to set up the split at settlement, with the investment portion sitting in an offset account until you're ready to use it. Others require the funds to be drawn down at settlement. Knowing which lenders offer which structure is part of the process we work through when setting up the refinance application.

What happens to your interest rate when you refinance to release equity

Your new interest rate will reflect current market rates, not the rate you were paying on your existing loan. If you've been on the same loan for several years without reviewing it, you may be on a higher rate than what's currently available. Refinancing to access equity can also be an opportunity to access a lower interest rate, though that depends on your loan-to-value ratio and your borrowing profile.

Lenders price loans based on risk. A loan at 60% loan-to-value ratio will usually attract a lower rate than a loan at 80% loan-to-value ratio. If releasing equity pushes your loan-to-value ratio above 80%, you may pay a higher rate than you would on a lower leverage loan. You'll also need to pay lenders mortgage insurance, which can add several thousand dollars to the cost.

Some lenders offer rate discounts for professionals, including lawyers. These aren't advertised publicly and they vary by lender and by loan amount. A 0.10% to 0.20% discount might not sound significant, but over the life of a large loan, it can amount to tens of thousands of dollars in saved interest.

Call one of our team or book an appointment at a time that works for you. We'll assess your current equity position, calculate how much you can access based on your income and the property value, and structure the loan so the interest treatment aligns with how you're using the funds.

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