Understanding Low Equity Refinancing

Refinancing a home loan with less than 20% equity means your loan-to-value ratio (LVR) is above 80%. This can happen when property values fall, or when you’ve made smaller repayments. With low equity, lenders may consider your application higher risk, and you may need to pay Lenders’ Mortgage Insurance (LMI) again if you refinance. LMI protects the lender, not you, and is typically charged when the LVR exceeds 80%. It’s important to factor this cost into your refinancing decision.

Options for Refinancing with Low Equity

If you’re considering refinancing with less than 20% equity, there are a few pathways you could explore:

  • Stay with your current lender: Sometimes your existing lender may offer a better rate or waive LMI if you’re a loyal customer, but this depends on their policies. It’s worth asking them directly.
  • Use a mortgage broker: A professional broker like Arrivau can help you compare options from multiple lenders, including those that may accept lower equity or have different LMI rules. Brokers have access to a broader range of products and can guide you through the process.
  • Increase your equity: You could make extra repayments to reduce your LVR below 80%, but this may take time and affect your cash flow.
  • Consider a guarantor: A guarantor, such as a family member, can help you secure a loan without LMI by providing additional security. This arrangement has its own responsibilities and risks.

LMI Implications

When you refinance with less than 20% equity, LMI is often a significant cost. The premium is usually based on your LVR and loan amount, and it’s added to your loan balance, increasing your total debt. This can make refinancing less attractive. However, LMI is not always required if you meet certain conditions, such as if your loan is capped at a specific LVR or if you have a strong credit history and savings. But these conditions vary by lender and are not guaranteed.

Australian homeowner reviewing refinance options

Practical Steps to Take

Before you refinance, it’s wise to:

  • Review your current loan: Understand your interest rate, fees, and remaining term to compare with offers.
  • Calculate the cost of LMI: Use a calculator or ask your broker for an estimate to see how LMI affects your overall savings.
  • Check your credit score: A higher score may improve your chances of getting a better deal or avoiding LMI.
  • Consult a professional: Arrivau provides Australian loan broker information and services, and can connect you with experts who can assess your situation.

Refinancing with low equity can still be worthwhile if the interest rate savings outweigh the LMI cost and other fees. But it’s essential to weigh the numbers carefully and seek professional advice tailored to your circumstances.

For more guidance, you might find the 2026 Australian Home Loan Guide helpful. It covers strategies for property buyers in a shifting market and can give you a broader perspective on financing options.