For Australian homeowners looking to access funds or reduce their mortgage costs, understanding the difference between home refinance vs home equity loan is crucial. Both options allow homeowners to tap into their property’s equity, but they serve different financial needs. Choosing between them depends on factors like interest rates, repayment terms, eligibility requirements, and overall financial goals.
This guide explores refinancing vs home equity loan pros and cons, eligibility criteria, and key considerations to help you make an informed decision.
Understanding Home Refinance vs Home Equity Loan
Both refinancing and home equity loans utilise the equity in your home, but they function differently:
- Home Refinance: This involves replacing your existing mortgage with a new loan, ideally with better terms such as a lower interest rate or extended repayment period. Many homeowners refinance to save on interest or change their loan structure. Learn how to secure lower refinance mortgage rates here.
- Home Equity Loan: A separate loan secured against the available equity in your home, providing a lump sum that can be used for renovations, investments, or other expenses.
Each option has its benefits, but the best choice depends on your financial situation and goals.
Refinancing vs Home Equity Loan Pros and Cons
| Feature | Home Refinance | Home Equity Loan |
| Purpose | Lower interest, adjust loan term, or access cash | Lump sum for specific expenses |
| Interest Rates | Generally lower | Slightly higher due to second loan risk |
| Loan Terms | New terms replace existing mortgage | Fixed term, separate from current mortgage |
| Access to Funds | Can withdraw equity via cash-out refinance | Receives a one-time lump sum |
| Impact on Mortgage | Pays off old loan, starts a new one | Adds a second loan on top of existing mortgage |
| Best For | Lowering mortgage costs, consolidating debt | Large one-time expenses, such as renovations |
If your goal is to reduce your monthly mortgage repayments, refinancing might be the better option. On the other hand, if you need a lump sum for a big expense without changing your main mortgage, a home equity loan may suit you better.
To estimate potential savings, try our Refinance Calculator.
Choosing Between Home Refinance and Home Equity Loan
1. Home Equity Loan or Refinance for Lower Interest?
If your goal is to secure a lower interest rate, refinancing is often the better choice. With a strong credit profile, you may qualify for a reduced rate, potentially lowering your monthly repayments. However, if current interest rates are higher than when you initially took out your mortgage, a home equity loan might be a better alternative to avoid losing your favourable rate.
Want to understand how refinancing can lower your interest rates? Check out our guide on How to Refinance Your Home Loan.
2. Refinance vs Home Equity Loan Requirements
The requirements for both options vary, but they typically include:
- Equity Requirement: Lenders generally require at least 20% equity in your home.
- Credit Score: A good credit history is necessary for favourable terms.
- Income Stability: Proof of consistent income and ability to repay the loan.
- Property Appraisal: A valuation to determine the current market value of your home.
For self-employed borrowers, lenders may require additional financial documents such as tax returns, business financial statements, and bank statements to prove income stability.
If you’re considering refinancing, compare different loan options with our Home Loan Comparison Calculator.
3. Can I Access Equity Without Refinancing?
Yes, a home equity loan allows you to access your equity without refinancing your entire mortgage. Alternatively, a home equity line of credit (HELOC) provides a flexible credit option that enables withdrawals as needed.
4. Refinance vs Home Equity Loan for Self-Employed Borrowers
Self-employed individuals often face stricter lending criteria. A low-doc loan might be an option, allowing alternative income verification methods such as accountant declarations or business financial statements.
Frequently Asked Questions
What’s the Difference Between Refinancing and a Home Equity Loan?
Refinancing replaces your existing mortgage with a new loan, usually to lower interest rates or adjust loan terms. A home equity loan is a separate loan using your home as collateral, providing a lump sum of funds.
Is It Better to Refinance or Get a Home Equity Loan?
It depends on your goals. If you want lower repayments and better loan terms, refinancing is ideal. If you need a lump sum for expenses like renovations or investments, a home equity loan may be better.
Can I Access Equity Without Refinancing?
Yes, through a home equity loan or a home equity line of credit (HELOC) without altering your existing mortgage.
What Are the Equity Requirements for Refinancing?
Most lenders require at least 20% equity in your home to refinance.
What is the Criteria for Refinance?
Key criteria include sufficient home equity, a strong credit score, stable income, and a property appraisal.
Refinance vs Home Equity Loan for Self-Employed Borrowers?
Self-employed individuals may need alternative income verification, such as low-doc loans, tax returns, and business financial statements.
Takeaway
Understanding the difference between home refinance vs home equity loan is essential in making the right financial decision. If you’re unsure which option suits you best, The Brokerage Connection can help. Our expert finance brokers provide tailored solutions based on your financial situation and goals.
Need guidance on refinancing or accessing your home equity? Contact The Brokerage Connection today for personalised advice and competitive loan options.