What is cash-out refinancing?
Cash-out refinancing (also called equity release or equity access refinancing) is when you refinance your home loan to an amount larger than your existing loan balance — and receive the difference as usable cash.
It is not a separate product — it is simply refinancing to a higher loan amount. The new loan pays out your existing mortgage and gives you the surplus funds to use for whatever purpose you nominate. The key constraint is lender maximums on LVR (usually 80% without LMI) and serviceability on the larger loan amount.
Example: calculating usable equity
This $280,000 can be accessed as cash at refinancing. Your new loan becomes $760,000. Your repayments increase to reflect the larger balance — factor this into the decision.
How much equity can you access?
The standard maximum is 80% LVR without Lenders Mortgage Insurance. Going above 80% LVR triggers LMI, which adds cost and typically only makes sense if the equity purpose is high-return investment. Most lenders cap cash-out refinancing at 80% for owner-occupier purposes.
| Property Value | Current Loan | Max New Loan (80%) | Accessible Equity |
|---|---|---|---|
| $700,000 | $350,000 | $560,000 | $210,000 |
| $950,000 | $480,000 | $760,000 | $280,000 |
| $1,400,000 | $600,000 | $1,120,000 | $520,000 |
| $2,000,000 | $800,000 | $1,600,000 | $800,000 |
What to use equity for — and what not to
✓ Strong uses of equity
- Investment property deposit
- Share portfolio (gearing)
- Business capital or expansion
- Value-adding renovations
- Paying off high-interest debt (credit cards, personal loans)
⚠ Use with caution
- Lifestyle spending (holidays, cars)
- Non-value-adding renovations
- Volatile assets without clear strategy
- Business with uncertain cash flow
The test: does the use of the equity generate a return greater than the mortgage interest rate? Investment property, shares, and value-adding renovations often meet this bar. Lifestyle spending rarely does — and you are using your home as collateral.
Tax implications: critical to understand
The deductibility of interest on released equity depends entirely on the purpose of the funds:
- Investment use (shares, IP deposit, business): Interest on the equity release portion is generally tax-deductible under Section 8-1 of the Income Tax Assessment Act 1997 — the borrowed funds are used to produce assessable income.
- Personal use (renovation of PPOR, car, holiday): Interest is not deductible — the funds are not used to produce income.
- Mixed use: Must be apportioned. A loan split (creating a separate loan for each purpose) simplifies this tracking and ensures clean deductibility records.
Always get tax advice first. The ATO scrutinises equity release arrangements carefully. The deductibility rules are straightforward in principle but can be complex in practice — especially with mixed-use funds. Discuss your specific situation with a qualified accountant before proceeding, not after.
Structuring equity release correctly
Best practice for equity release, especially for investment purposes, is to create a separate split loan rather than rolling everything into one loan. This means:
- Loan 1: Original home loan (retained at existing balance) — non-deductible interest
- Loan 2: New equity release component — deductible interest if used for investment
Keeping the purposes separated by loan account maintains clean records for tax purposes and avoids the "contamination" problem where mixing deductible and non-deductible purposes in one loan requires complex apportionment calculations. Your broker structures this at the application stage — it is not more complex to set up, just requires the right lender and loan structure.
Equity release vs a separate investment loan
An alternative to equity release refinancing is taking a separate investment loan secured against your property. Both approaches access the same equity — the difference is structure and flexibility:
- Equity release (refinance): One loan, simpler, potentially better rate, but mixes balances if not split correctly
- Separate investment loan (home equity loan / line of credit): Cleaner separation, drawdown flexibility, but typically slightly higher rate and two loan accounts to manage
For most borrowers using equity for a single investment purpose, an equity release refinance with a loan split is the simplest and most cost-effective approach. Your broker can advise on the optimal structure for your specific purpose.